UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
þ | Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
For the quarterly period ended December 31, 2013
OR
¨ | Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
Commission File Number |
Exact name of registrant as specified in its charter and principal office address and telephone number |
State of Incorporation |
I.R.S. Employer Identification No. | |||
1-16163 |
WGL Holdings, Inc. 101 Constitution Ave., N.W. Washington, D.C. 20080 (703) 750-2000 |
Virginia | 52-2210912 | |||
0-49807 |
Washington Gas Light Company 101 Constitution Ave., N.W. Washington, D.C. 20080 (703) 750-4440 |
District of Columbia and Virginia |
53-0162882 |
Indicate by check mark whether each registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrants were required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes þ No ¨
Indicate by check mark whether each registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes þ No ¨
Indicate by check mark whether each registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of large accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act. (Check one):
WGL Holdings, Inc.:
Large accelerated filer þ | Accelerated filer ¨ | Non-accelerated filer ¨ | Smaller reporting company ¨ | |||
(Do not check if a smaller reporting company) |
Washington Gas Light Company:
Large accelerated filer ¨ | Accelerated filer ¨ | Non-accelerated filer þ | Smaller reporting company ¨ | |||
(Do not check if a smaller reporting company) |
Indicate by check mark whether each registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No þ
Indicate the number of shares outstanding of each of the issuers classes of common stock, as of the latest practicable date.
WGL Holdings, Inc. common stock, no par value, outstanding as of January 31, 2014: 51,860,763 shares.
All of the outstanding shares of common stock ($1 par value) of Washington Gas Light Company were held by WGL Holdings, Inc. as of January 31, 2014.
Washington Gas Light Company
For the Quarter Ended December 31, 2013
Table of Contents
(i)
WGL Holdings, Inc.
Washington Gas Light Company
INTRODUCTION
FILING FORMAT
This Quarterly Report on Form 10-Q is a combined report being filed by two separate registrants: WGL Holdings, Inc. (WGL) and Washington Gas Light Company (Washington Gas). Except where the content clearly indicates otherwise, any reference in the report to WGL, we, us or our is to the holding company or the consolidated entity of WGL Holdings, Inc. and all of its subsidiaries, including Washington Gas.
Part I Financial information in this Quarterly Report on Form 10-Q includes separate financial statements (i.e. balance sheets, statements of income and comprehensive income and statements of cash flows) for WGL and Washington Gas. The Notes to Consolidated Financial Statements are also included and are presented on a combined basis for both WGL and Washington Gas. The Managements Discussion and Analysis of Financial Condition and Results of Operations (Managements Discussion) included under Item 2 is divided into two major sections for WGL and Washington Gas.
SAFE HARBOR FOR FORWARD-LOOKING STATEMENTS
Certain matters discussed in this report, excluding historical information, include forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 with respect to the outlook for earnings, revenues and other future financial business performance or strategies and expectations. Forward-looking statements are typically identified by words such as, but not limited to, estimates, expects, anticipates, intends, believes, plans and similar expressions, or future or conditional verbs such as will, should, would and could. Although the registrants, WGL and Washington Gas, believe such forward-looking statements are based on reasonable assumptions, they cannot give assurance that every objective will be achieved. Forward-looking statements speak only as of today, and the registrants assume no duty to update them. The following factors, among others, could cause actual results to differ materially from forward-looking statements or historical performance:
| the level and rate at which costs and expenses are incurred and the extent to which they are allowed to be recovered from customers through the regulatory process in connection with constructing, operating and maintaining Washington Gas distribution system; |
| the ability to implement successful approaches to modify the current or future composition of gas delivered to customers or to remediate the effects of the current or future composition of gas delivered to customers, as a result of the introduction of gas from the Dominion Cove Point or Elba Island facilities to Washington Gas distribution system or changes in the composition of domestic natural gas as a result of liquids processing and new domestic sources of natural gas; |
| the availability of natural gas supply and interstate pipeline transportation and storage capacity; |
| the ability of natural gas producers, pipeline gatherers and natural gas processors to deliver natural gas into interstate pipelines for delivery by those interstate pipelines to the entrance points of Washington Gas distribution system as a result of factors beyond our control; |
| changes and developments in economic, competitive, political and regulatory conditions; |
| changes in capital and energy commodity market conditions; |
| changes in credit ratings of debt securities of WGL or Washington Gas that may affect access to capital or the cost of debt; |
| changes in credit market conditions and creditworthiness of customers and suppliers; |
| changes in relevant laws and regulations, including tax, environmental, pipeline integrity and employment laws and regulations; |
| legislative, regulatory and judicial mandates or decisions affecting business operations or the timing of recovery of costs and expenses; |
| the timing and success of business and product development efforts and technological improvements; |
| the pace of deregulation efforts and the availability of other competitive alternatives to our products and services; |
| changes in accounting principles; |
(ii)
WGL Holdings, Inc.
Washington Gas Light Company
| new commodity purchase and sales contracts or financial contracts and modifications in the terms of existing contracts that may materially affect fair value calculations under derivative accounting requirements; |
| the ability to manage the outsourcing of several business processes; |
| acts of nature; |
| terrorist activities and |
| other uncertainties. |
The outcome of negotiations and discussions that the registrants may hold with other parties from time to time regarding utility and energy-related investments and strategic transactions that are both recurring and non-recurring may also affect future performance. All such factors are difficult to predict accurately and are generally beyond the direct control of the registrants. Accordingly, while they believe that the assumptions are reasonable, the registrants cannot ensure that all expectations and objectives will be realized. Readers are urged to use care and consider the risks, uncertainties and other factors that could affect the registrants business as described in this Quarterly Report on Form 10-Q. All forward-looking statements made in this report rely upon the safe harbor protections provided under the Private Securities Litigation Reform Act of 1995.
(iii)
Condensed Consolidated Balance Sheets (Unaudited)
(In thousands) | December 31,
2013 |
September 30, 2013 |
||||||
ASSETS |
||||||||
Property, Plant and Equipment |
||||||||
At original cost |
$ | 4,169,718 | $ | 4,118,149 | ||||
Accumulated depreciation and amortization |
(1,222,359 | ) | (1,210,686 | ) | ||||
Net property, plant and equipment |
2,947,359 | 2,907,463 | ||||||
Current Assets |
||||||||
Cash and cash equivalents |
4,810 | 3,478 | ||||||
Receivables |
||||||||
Accounts receivable |
399,577 | 229,544 | ||||||
Gas costs and other regulatory assets |
10,328 | 10,825 | ||||||
Unbilled revenues |
207,618 | 98,598 | ||||||
Allowance for doubtful accounts |
(18,518 | ) | (20,433 | ) | ||||
Net receivables |
599,005 | 318,534 | ||||||
Materials and suppliesprincipally at average cost |
24,825 | 24,904 | ||||||
Storage gas |
241,868 | 347,291 | ||||||
Deferred income taxes |
25,714 | 24,522 | ||||||
Prepaid taxes |
62,432 | 24,450 | ||||||
Other prepayments |
38,202 | 29,922 | ||||||
Derivatives |
23,461 | 35,315 | ||||||
Other |
19,970 | 11,595 | ||||||
Total current assets |
1,040,287 | 820,011 | ||||||
Deferred Charges and Other Assets |
||||||||
Regulatory assets |
||||||||
Gas costs |
204,655 | 93,963 | ||||||
Pension and other post-retirement benefits |
242,401 | 240,634 | ||||||
Other |
65,917 | 66,010 | ||||||
Derivatives |
9,160 | 26,306 | ||||||
Investment in direct financing leases, capital leases |
23,042 | 23,390 | ||||||
Investment in unconsolidated affiliates |
83,402 | 67,522 | ||||||
Other |
15,303 | 14,761 | ||||||
Total deferred charges and other assets |
643,880 | 532,586 | ||||||
Total Assets |
$ | 4,631,526 | $ | 4,260,060 | ||||
CAPITALIZATION AND LIABILITIES |
||||||||
Capitalization |
||||||||
Common shareholders equity |
$ | 1,272,861 | $ | 1,274,545 | ||||
Washington Gas Light Company preferred stock |
28,173 | 28,173 | ||||||
Long-term debt |
599,223 | 524,067 | ||||||
Total capitalization |
1,900,257 | 1,826,785 | ||||||
Current Liabilities |
||||||||
Current maturities of long-term debt |
30,000 | 67,000 | ||||||
Notes payable |
443,300 | 373,100 | ||||||
Accounts payable and other accrued liabilities |
313,955 | 270,658 | ||||||
Wages payable |
17,005 | 18,645 | ||||||
Accrued interest |
10,462 | 3,399 | ||||||
Dividends declared |
22,111 | 22,075 | ||||||
Customer deposits and advance payments |
69,235 | 67,154 | ||||||
Gas costs and other regulatory liabilities |
78,641 | 27,013 | ||||||
Accrued taxes |
29,868 | 16,056 | ||||||
Derivatives |
41,398 | 48,413 | ||||||
Other |
34,396 | 36,564 | ||||||
Total current liabilities |
1,090,371 | 950,077 | ||||||
Deferred Credits |
||||||||
Unamortized investment tax credits |
74,868 | 46,378 | ||||||
Deferred income taxes |
641,699 | 629,807 | ||||||
Accrued pensions and benefits |
150,294 | 148,890 | ||||||
Asset retirement obligations |
102,412 | 101,321 | ||||||
Regulatory liabilities |
||||||||
Accrued asset removal costs |
320,134 | 321,266 | ||||||
Other |
15,016 | 13,459 | ||||||
Derivatives |
245,609 | 141,334 | ||||||
Other |
90,866 | 80,743 | ||||||
Total deferred credits |
1,640,898 | 1,483,198 | ||||||
Commitments and Contingencies (13) |
||||||||
Total Capitalization and Liabilities |
$ | 4,631,526 | $ | 4,260,060 | ||||
The accompanying notes are an integral part of these statements.
4
Condensed Consolidated Statements of Income (Unaudited)
Part IFinancial Information
Item 1Financial Statements (continued)
Three Months Ended December 31, |
||||||||
(In thousands, except per share data) | 2013 | 2012 | ||||||
OPERATING REVENUES |
||||||||
Utility |
$ | 386,541 | $ | 347,933 | ||||
Non-utility |
293,756 | 338,803 | ||||||
Total Operating Revenues |
680,297 | 686,736 | ||||||
OPERATING EXPENSES |
||||||||
Utility cost of gas |
186,881 | 142,970 | ||||||
Non-utility cost of energy-related sales |
305,351 | 299,149 | ||||||
Operation and maintenance |
88,142 | 83,630 | ||||||
Depreciation and amortization |
26,590 | 27,304 | ||||||
General taxes and other assessments |
40,621 | 39,067 | ||||||
Total Operating Expenses |
647,585 | 592,120 | ||||||
OPERATING INCOME |
32,712 | 94,616 | ||||||
Equity in earnings of unconsolidated affiliates |
490 | 245 | ||||||
Other incomenet |
219 | 429 | ||||||
Interest expense |
8,992 | 9,193 | ||||||
INCOME BEFORE INCOME TAXES |
24,429 | 86,097 | ||||||
INCOME TAX EXPENSE |
5,470 | 33,379 | ||||||
NET INCOME |
$ | 18,959 | $ | 52,718 | ||||
Dividends on Washington Gas Light Company preferred stock |
330 | 330 | ||||||
NET INCOME APPLICABLE TO COMMON STOCK |
$ | 18,629 | $ | 52,388 | ||||
AVERAGE COMMON SHARES OUTSTANDING |
||||||||
Basic |
51,816 | 51,631 | ||||||
Diluted |
51,827 | 51,688 | ||||||
EARNINGS PER AVERAGE COMMON SHARE |
||||||||
Basic |
$ | 0.36 | $ | 1.01 | ||||
Diluted |
$ | 0.36 | $ | 1.01 | ||||
DIVIDENDS DECLARED PER COMMON SHARE |
$ | 0.4200 | $ | 0.4000 | ||||
The accompanying notes are an integral part of these statements.
5
Condensed Consolidated Statements of Comprehensive Income (Unaudited)
Part IFinancial Information
Item 1Financial Statements (continued)
Three Months Ended December 31, |
||||||||
(In thousands) | 2013 | 2012 | ||||||
NET INCOME |
$ | 18,959 | $ | 52,718 | ||||
OTHER COMPREHENSIVE INCOME, BEFORE INCOME TAXES: |
||||||||
Pension and other postretirement benefit plans |
||||||||
Change in prior service cost (credit) |
(35 | ) | (12 | ) | ||||
Change in actuarial net loss |
364 | 462 | ||||||
Change in transition obligation |
| 9 | ||||||
Total pension and other postretirement benefit plans |
$ | 329 | $ | 459 | ||||
INCOME TAX EXPENSE RELATED TO OTHER COMPREHENSIVE INCOME |
130 | 182 | ||||||
OTHER COMPREHENSIVE INCOME |
$ | 199 | $ | 277 | ||||
COMPREHENSIVE INCOME |
$ | 19,158 | $ | 52,995 | ||||
The accompanying notes are an integral part of these statements.
6
Condensed Consolidated Statements of Cash Flows (Unaudited)
Part IFinancial Information
Item 1Financial Statements (continued)
Three Months Ended December 31, | ||||||||
(In thousands) | 2013 | 2012 | ||||||
OPERATING ACTIVITIES |
||||||||
Net income |
$ | 18,959 | $ | 52,718 | ||||
ADJUSTMENTS TO RECONCILE NET INCOME TO NET CASH USED IN OPERATING ACTIVITIES |
||||||||
Depreciation and amortization |
26,590 | 27,304 | ||||||
Amortization of: |
||||||||
Other regulatory assets and liabilitiesnet |
360 | 238 | ||||||
Debt related costs |
26 | 216 | ||||||
Deferred income taxesnet |
4,953 | 26,486 | ||||||
Accrued/deferred pension cost |
7,796 | 7,965 | ||||||
Compensation expense related to equity awards |
691 | 1,214 | ||||||
Provision for doubtful accounts |
1,920 | 4,010 | ||||||
Impairment loss on Springfield Operations Center |
770 | | ||||||
Other non-cash charges (credits)net |
1,165 | 1,569 | ||||||
CHANGES IN ASSETS AND LIABILITIES |
||||||||
Accounts receivable and unbilled revenuesnet |
(282,888 | ) | (197,868 | ) | ||||
Gas costs and other regulatory assets/liabilitiesnet |
52,125 | 54,297 | ||||||
Storage gas |
105,423 | 2,646 | ||||||
Prepaid taxes |
(37,982 | ) | (1,220 | ) | ||||
Other prepayments |
(8,280 | ) | (10,293 | ) | ||||
Accounts payable and other accrued liabilities |
44,217 | 42,496 | ||||||
Wages payable |
(1,640 | ) | (2,012 | ) | ||||
Customer deposits and advance payments |
2,081 | (9,765 | ) | |||||
Unamortized investment tax credits |
28,490 | 6,518 | ||||||
Accrued taxes |
13,812 | 9,092 | ||||||
Accrued interest |
7,063 | 7,374 | ||||||
Other current assets |
3,558 | (4,114 | ) | |||||
Other current liabilities |
(9,183 | ) | (3,455 | ) | ||||
Deferred gas costsnet |
(110,692 | ) | (50,159 | ) | ||||
Deferred assetsother |
(7,789 | ) | 14,939 | |||||
Deferred liabilitiesother |
13,322 | 1,017 | ||||||
Derivativesdeferred |
121,421 | 1,165 | ||||||
Othernet |
(8,897 | ) | 655 | |||||
Net Cash Used In Operating Activities |
(12,609 | ) | (16,967 | ) | ||||
FINANCING ACTIVITIES |
||||||||
Common stock issued |
| 281 | ||||||
Long-term debt issued |
75,252 | 1,491 | ||||||
Long-term debt retired |
(37,000 | ) | | |||||
Notes payable issued (retired)net |
70,200 | 113,700 | ||||||
Dividends on common stock and preferred stock |
(22,089 | ) | (19,688 | ) | ||||
Other financing activitiesnet |
1,415 | (1,129 | ) | |||||
Net Cash Provided by Financing Activities |
87,778 | 94,655 | ||||||
INVESTING ACTIVITIES |
||||||||
Capital expenditures (excluding AFUDC) |
(58,305 | ) | (75,917 | ) | ||||
Investments in non-utility interests |
(15,532 | ) | (8,116 | ) | ||||
Distributions from non-utility interests |
| 666 | ||||||
Net Cash Used in Investing Activities |
(73,837 | ) | (83,367 | ) | ||||
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS |
1,332 | (5,679 | ) | |||||
Cash and Cash Equivalents at Beginning of Year |
3,478 | 10,263 | ||||||
Cash and Cash Equivalents at End of Period |
$ | 4,810 | $ | 4,584 | ||||
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION |
||||||||
Income taxes paidnet |
$ | 7,376 | $ | 200 | ||||
Interest paid |
$ | 1,789 | $ | 1,559 | ||||
SUPPLEMENTAL DISCLOSURES OF NON-CASH INVESTING AND FINANCING ACTIVITIES |
||||||||
Project debt financing activitiesnet |
$ | 253 | $ | 1,491 | ||||
Capital expenditure accruals included in accounts payable and other accrued liabilities |
$ | 16,058 | $ | 18,781 | ||||
Dividends paid in common stock |
$ | 1,312 | $ | 1,287 |
The accompanying notes are an integral part of these statements.
7
Washington Gas Light Company
Condensed Balance Sheets (Unaudited)
Part IFinancial Information
Item 1Financial Statements (continued)
(In thousands) | December 31, 2013 |
September 30, 2013 |
||||||
ASSETS |
||||||||
Property, Plant and Equipment |
||||||||
At original cost |
$ | 3,939,507 | $ | 3,903,482 | ||||
Accumulated depreciation and amortization |
(1,188,730 | ) | (1,178,600 | ) | ||||
Net property, plant and equipment |
2,750,777 | 2,724,882 | ||||||
Current Assets |
||||||||
Cash and cash equivalents |
2 | | ||||||
Receivables |
||||||||
Accounts receivable |
220,522 | 91,405 | ||||||
Gas costs and other regulatory assets |
10,328 | 10,825 | ||||||
Unbilled revenues |
111,412 | 19,418 | ||||||
Allowance for doubtful accounts |
(16,014 | ) | (17,498 | ) | ||||
Net receivables |
326,248 | 104,150 | ||||||
Materials and suppliesprincipally at average cost |
24,778 | 24,857 | ||||||
Storage gas |
124,148 | 132,226 | ||||||
Deferred income taxes |
26,180 | 27,000 | ||||||
Other prepayments |
30,803 | 22,794 | ||||||
Receivables from associated companies |
4,847 | 7,173 | ||||||
Derivatives |
6,249 | 4,278 | ||||||
Other |
2 | | ||||||
Total current assets |
543,257 | 322,478 | ||||||
Deferred Charges and Other Assets |
||||||||
Regulatory assets |
||||||||
Gas costs |
204,655 | 93,963 | ||||||
Pension and other post-retirement benefits |
241,230 | 239,434 | ||||||
Other |
65,883 | 65,984 | ||||||
Derivatives |
| 16,051 | ||||||
Other |
12,403 | 11,597 | ||||||
Total deferred charges and other assets |
524,171 | 427,029 | ||||||
Total Assets |
$ | 3,818,205 | $ | 3,474,389 | ||||
CAPITALIZATION AND LIABILITIES |
||||||||
Capitalization |
||||||||
Common shareholders equity |
$ | 1,043,918 | $ | 1,024,583 | ||||
Preferred stock |
28,173 | 28,173 | ||||||
Long-term debt |
599,223 | 524,067 | ||||||
Total capitalization |
1,671,314 | 1,576,823 | ||||||
Current Liabilities |
||||||||
Current maturities of long-term debt |
30,000 | 67,000 | ||||||
Notes payable |
188,000 | 124,500 | ||||||
Accounts payable and other accrued liabilities |
171,579 | 132,814 | ||||||
Wages payable |
15,560 | 17,057 | ||||||
Accrued interest |
10,462 | 3,399 | ||||||
Dividends declared |
19,391 | 19,359 | ||||||
Customer deposits and advance payments |
69,235 | 67,154 | ||||||
Gas costs and other regulatory liabilities |
78,641 | 27,013 | ||||||
Accrued taxes |
34,996 | 25,380 | ||||||
Payables to associated companies |
35,952 | 20,557 | ||||||
Derivatives |
26,678 | 24,749 | ||||||
Other |
7,281 | 9,047 | ||||||
Total current liabilities |
687,775 | 538,029 | ||||||
Deferred Credits |
||||||||
Unamortized investment tax credits |
7,133 | 7,354 | ||||||
Deferred income taxes |
627,652 | 611,453 | ||||||
Accrued pensions and benefits |
148,882 | 147,479 | ||||||
Asset retirement obligations |
101,044 | 99,972 | ||||||
Regulatory liabilities |
||||||||
Accrued asset removal costs |
320,134 | 321,266 | ||||||
Other |
15,016 | 13,459 | ||||||
Derivatives |
188,639 | 106,144 | ||||||
Other |
50,616 | 52,410 | ||||||
Total deferred credits |
1,459,116 | 1,359,537 | ||||||
Commitments and Contingencies (Note 13) |
||||||||
Total Capitalization and Liabilities |
$ | 3,818,205 | $ | 3,474,389 | ||||
The accompanying notes are an integral part of these statements.
8
Condensed Statements of Income (Unaudited)
Part IFinancial Information
Item 1Financial Statements (continued)
Three Months Ended December 31, |
||||||||
(In thousands) | 2013 | 2012 | ||||||
OPERATING REVENUES |
$ | 390,415 | $ | 355,817 | ||||
OPERATING EXPENSES |
||||||||
Utility cost of gas |
190,695 | 150,448 | ||||||
Operation and maintenance |
72,072 | 70,393 | ||||||
Depreciation and amortization |
25,041 | 26,488 | ||||||
General taxes and other assessments |
37,378 | 36,451 | ||||||
Total Operating Expenses |
325,186 | 283,780 | ||||||
OPERATING INCOME |
65,229 | 72,037 | ||||||
Other income (expense)net |
(180 | ) | 139 | |||||
Interest expense |
8,879 | 9,095 | ||||||
INCOME BEFORE INCOME TAXES |
56,170 | 63,081 | ||||||
INCOME TAX EXPENSE |
17,363 | 24,364 | ||||||
NET INCOME |
$ | 38,807 | $ | 38,717 | ||||
Dividends on preferred stock |
330 | 330 | ||||||
NET INCOME APPLICABLE TO COMMON STOCK |
$ | 38,477 | $ | 38,387 | ||||
The accompanying notes are an integral part of these statements.
9
Condensed Consolidated Statements of Comprehensive Income (Unaudited)
Part IFinancial Information
Item 1Financial Statements (continued)
Three Months Ended December 31, |
||||||||
(In thousands) | 2013 | 2012 | ||||||
NET INCOME |
$ | 38,807 | $ | 38,717 | ||||
OTHER COMPREHENSIVE INCOME, BEFORE INCOME TAXES: |
||||||||
Pension and other postretirement benefit plans |
||||||||
Change in prior service cost (credit) |
(35 | ) | (12 | ) | ||||
Change in actuarial net loss |
364 | 462 | ||||||
Change in transition obligation |
| 9 | ||||||
Total pension and other postretirement benefit plans |
$ | 329 | $ | 459 | ||||
INCOME TAX EXPENSE RELATED TO OTHER COMPREHENSIVE INCOME |
130 | 182 | ||||||
OTHER COMPREHENSIVE INCOME |
$ | 199 | $ | 277 | ||||
COMPREHENSIVE INCOME |
$ | 39,006 | $ | 38,994 | ||||
The accompanying notes are an integral part of these statements.
10
Condensed Statements of Cash Flows (Unaudited)
Part IFinancial Information
Item 1Financial Statements (continued)
Three Months
Ended December 31, |
||||||||
(In thousands) | 2013 | 2012 | ||||||
OPERATING ACTIVITIES |
||||||||
Net income |
$ | 38,807 | $ | 38,717 | ||||
ADJUSTMENTS TO RECONCILE NET INCOME TO NET CASH USED IN OPERATING ACTIVITIES |
||||||||
Depreciation and amortization |
25,041 | 26,488 | ||||||
Amortization of: |
||||||||
Other regulatory assets and liabilitiesnet |
137 | 710 | ||||||
Debt related costs |
187 | 487 | ||||||
Deferred income taxesnet |
10,170 | 25,954 | ||||||
Accrued/deferred pension cost |
7,682 | 7,899 | ||||||
Compensation expense related to equity awards |
1,574 | 1,152 | ||||||
Provision for doubtful accounts |
1,815 | 3,208 | ||||||
Impairment loss on Springfield Operations Center |
770 | | ||||||
Other non-cash charges (credits)net |
1,284 | 1,610 | ||||||
CHANGES IN ASSETS AND LIABILITIES |
||||||||
Accounts receivable, unbilled revenues and receivables from associated companiesnet |
(222,084 | ) | (152,234 | ) | ||||
Gas costs and other regulatory assets/liabilitiesnet |
52,125 | 54,297 | ||||||
Storage gas |
8,078 | 9,500 | ||||||
Other prepayments |
(8,009 | ) | (6,924 | ) | ||||
Accounts payable and other accrued liabilities, including payables to associated companies |
59,119 | 6,982 | ||||||
Wages payable |
(1,497 | ) | (1,463 | ) | ||||
Customer deposits and advance payments |
2,081 | (12,915 | ) | |||||
Accrued taxes |
9,616 | 8,087 | ||||||
Accrued interest |
7,063 | 7,374 | ||||||
Other current assets |
(1,894 | ) | 1,798 | |||||
Other current liabilities |
(1,766 | ) | (2,728 | ) | ||||
Deferred gas costsnet |
(110,692 | ) | (33,620 | ) | ||||
Deferred assetsother |
8,344 | 15,096 | ||||||
Deferred liabilitiesother |
1,866 | (5,764 | ) | |||||
Derivativesdeferred |
84,424 | (11,720 | ) | |||||
Othernet |
(1,635 | ) | (30 | ) | ||||
Net Cash Used In Operating Activities |
(27,394 | ) | (18,039 | ) | ||||
FINANCING ACTIVITIES |
||||||||
Long-term debt issued |
75,252 | 1,491 | ||||||
Long-term debt retired |
(37,000 | ) | | |||||
Notes payable issued (retired)net |
63,500 | 96,200 | ||||||
Dividends on common stock and preferred stock |
(19,373 | ) | (18,912 | ) | ||||
Other financing activitiesnet |
(595 | ) | (677 | ) | ||||
Net Cash Provided by Financing Activities |
81,784 | 78,102 | ||||||
INVESTING ACTIVITIES |
||||||||
Capital expenditures (excluding AFUDC) |
(54,388 | ) | (60,063 | ) | ||||
Net Cash Used in Investing Activities |
(54,388 | ) | (60,063 | ) | ||||
INCREASE IN CASH AND CASH EQUIVALENTS |
2 | | ||||||
Cash and Cash Equivalents at Beginning of Year |
| 1 | ||||||
Cash and Cash Equivalents at End of Period |
$ | 2 | $ | 1 | ||||
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION |
||||||||
Income taxes paidnet |
$ | 7,200 | $ | | ||||
Interest paid |
$ | 1,676 | $ | 1,461 | ||||
SUPPLEMENTAL DISCLOSURES OF NON-CASH INVESTING AND FINANCING ACTIVITIES |
||||||||
Project debt financing activitiesnet |
$ | 253 | $ | 1,491 | ||||
Capital expenditure accruals included in accounts payable and other accrued liabilities |
$ | 11,471 | $ |
17,935 |
|
The accompanying notes are an integral part of these statements.
11
WGL Holdings, Inc.
Washington Gas Light Company
Part IFinancial Information
Item 1Financial Statements (continued)
Notes to Consolidated Financial Statements (Unaudited)
NOTE 1. ACCOUNTING POLICIES
Basis of Presentation
WGL Holdings, Inc. (WGL) is a holding company that owns all of the shares of common stock of Washington Gas Light Company (Washington Gas), a regulated natural gas utility, and all of the shares of common stock of Washington Gas Resources Corporation (Washington Gas Resources), Hampshire Gas Company (Hampshire) and Crab Run Gas Company. Washington Gas Resources owns all of the shares of common stock of four non-utility subsidiaries that include Washington Gas Energy Services, Inc. (WGEServices), Washington Gas Energy Systems, Inc. (WGESystems), WGL Midstream, Inc. (WGL Midstream) and WGSW, Inc. (WGSW). Except where the content clearly indicates otherwise, WGL, we, us or our refers to the holding company or the consolidated entity of WGL Holdings, Inc. and all of its subsidiaries. Unless otherwise noted, these notes apply equally to WGL and Washington Gas.
The interim consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (SEC). Therefore, certain financial information and note disclosures accompanying annual financial statements prepared in accordance with generally accepted accounting principles in the United States of America (GAAP) are omitted in this interim report. The interim consolidated financial statements and accompanying notes should be read in conjunction with the combined Annual Report on Form 10-K for WGL and Washington Gas for the fiscal year ended September 30, 2013. Due to the seasonal nature of our businesses, the results of operations for the periods presented in this report are not necessarily indicative of actual results for the full fiscal years ending September 30, 2014 and 2013 of either WGL or Washington Gas.
The accompanying unaudited financial statements for WGL and Washington Gas reflect all normal recurring adjustments that are necessary, in our opinion, to present fairly the results of operations in accordance with GAAP. Certain reclassifications have been recast to conform to current year presentation.
For a complete description of our accounting policies, refer to Note 1 of the Notes to Consolidated Financial Statements of the combined Annual Report on Form 10-K for WGL and Washington Gas for the fiscal year ended September 30, 2013.
Storage Gas Valuations
For Washington Gas and WGEServices, storage gas inventory is stated at the lower-of-cost or market as determined using the first-in, first-out method. For WGL Midstream, storage gas inventory is stated at the lower-of-cost or market using the weighted average cost method. For the three months ended December 31, 2013, WGL Midstream recorded a minimal reduction to net income for lower of cost or market adjustments. For the three months ended December 31, 2012, WGL Midstream recorded a reduction to net income of $8.4 million for lower-of cost or market adjustments.
In conjunction with optimizing Washington Gas storage capacity, storage gas inventory may be subject to lower-of-cost or market adjustments. For the three months ended December 31, 2013 and 2012, Washington Gas did not record any lower-of-cost or market adjustments related to its storage gas inventory.
Accounting Standards Adopted in the Current Fiscal Year
Balance Sheet Offsetting. In December 2011, the FASB issued ASU 2011-11, Disclosures about Offsetting Assets and Liabilities. This standard amends the disclosure requirements on offsetting in ASC Topic 210 by requiring enhanced disclosures about financial instruments and derivative instruments that are either: (i) offset in accordance with existing guidance or (ii) subject to an enforceable master netting arrangement or similar agreement, irrespective of whether they are offset on the balance sheet. In January 2013, the FASB issued ASU 2013-01, Clarifying the Scope of the Disclosures about Offsetting Assets and Liabilities. ASU 2013-01 limits the scope of the required disclosures to derivatives, repurchase agreements and securities borrowing and securities lending transactions. The disclosures are required irrespective of whether the transactions are offset in the statement of financial position. ASU 2011-11 and ASU 2013-01 were effective for us on October 1, 2013. As a result of the standard, additional disclosures regarding master netting arrangements were added to Note 8 - Derivatives and Weather-Related Instruments. The adoption of these standards did not otherwise affect our financial statements.
Comprehensive Income. In February 2013, the FASB issued ASU 2013-02, Comprehensive Income (Topic 220): Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income. This standard requires entities to (i) present information about reclassification adjustments from accumulated other comprehensive income (AOCI) to net income in their entirety the effect on the reclassification on each affected net income line item and (ii) for AOCI reclassification
12
Washington Gas Light Company
Part IFinancial Information
Item 1Financial Statements (continued)
Notes to Consolidated Financial Statements (Unaudited)
items that are not reclassified in their entirety into net income a cross-reference to other required US GAAP disclosures. The reclassification information may be presented in a single note or on the face of the financial statements. ASU 2013-02 was effective for us on October 1, 2013. As a result of this standard, we have presented information about reclassification adjustments out of accumulated other comprehensive income in a new footnote to the financial statements. Refer to Note 15 Changes in Accumulated Other Comprehensive Income for the details of this disclosure. The adoption of this standard did not otherwise affect our financial statements.
Other Newly Issued Accounting Standards
Income Taxes. In July 2013, the FASB issued ASU 2013-11, Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists. This standard amends the disclosure requirement of ASC Topic 740 by requiring an unrecognized tax benefit, or a portion of an unrecognized tax benefit be presented in the financial statements as a reduction to a deferred tax asset in most circumstances. ASU 2013-11 will be effective for us on October 1, 2014. We do not expect the adoption of this standard to have a material effect on our financial statements.
NOTE 2. ACCOUNTS PAYABLE AND OTHER ACCRUED LIABILITIES
The tables below provide details for the amounts included in Accounts payable and other accrued liabilities on the balance sheets for both WGL and Washington Gas.
WGL Holdings, Inc. | ||||||||
(In millions) | December 31, 2013 | September 30, 2013 | ||||||
Accounts payabletrade |
$ | 277.0 | $ | 216.3 | ||||
Employee benefits and payroll accruals |
14.2 | 23.4 | ||||||
Embedded derivatives and other accrued liabilities |
22.7 | 30.9 | ||||||
Total |
$ | 313.9 | $ | 270.6 | ||||
Washington Gas Light Company | ||||||||
(In millions) |
December 31, 2013 | September 30, 2013 | ||||||
Accounts payabletrade |
$ | 142.7 | $ | 99.7 | ||||
Employee benefits and payroll accruals |
13.5 | 21.4 | ||||||
Embedded derivatives and other accrued liabilities |
15.3 | 11.7 | ||||||
Total |
$ | 171.5 | $ | 132.8 | ||||
NOTE 3. SHORT-TERM DEBT
WGL and Washington Gas satisfy their short-term financing requirements through the sale of commercial paper or through bank borrowings. Due to the seasonal nature of the regulated utility and retail energy-marketing segments, short-term financing requirements can vary significantly during the year. Revolving credit agreements are maintained to support outstanding commercial paper and to permit short-term borrowing flexibility. WGLs policy is to maintain bank credit facilities in amounts equal to or greater than the expected maximum commercial paper position. The following is a summary of committed credit available at December 31, 2013 and September 30, 2013.
13
WGL Holdings, Inc.
Washington Gas Light Company
Part IFinancial Information
Item 1Financial Statements (continued)
Notes to Consolidated Financial Statements (Unaudited)
Committed Credit Available (In millions) | ||||||||||||
As of December 31, 2013 | WGL Holdings, Inc. (b) |
Washington Gas | Total Consolidated | |||||||||
Committed credit agreements |
||||||||||||
Unsecured revolving credit facility, expires April 3, 2017(a) |
$ | 450.0 | $ | 350.0 | $ | 800.0 | ||||||
Less: Commercial Paper |
(255.3 | ) | (188.0 | ) | (443.3 | ) | ||||||
Net committed credit available |
$ | 194.7 | $ | 162.0 | $ | 356.7 | ||||||
As of September 30, 2013 | WGL Holdings, Inc. (b) |
Washington Gas | Total Consolidated | |||||||||
Committed credit agreements | ||||||||||||
Unsecured revolving credit facility, expires April 3, 2017(a) |
$ | 450.0 | $ | 350.0 | $ | 800.0 | ||||||
Less: Commercial Paper |
(248.6 | ) | (124.5 | ) | (373.1 | ) | ||||||
Net committed credit available |
$ | 201.4 | $ | 225.5 | $ | 426.9 | ||||||
(a)Both WGL and Washington Gas have the right to request extensions with the banks approval. WGLs revolving credit facility permits it to borrow an additional $100 million, with the banks approval, for a total of $550 million. Washington Gas revolving credit facility permits it to borrow an additional $100 million, with the banks approval, for a total of $450 million.
(b)WGL Holdings, Inc. includes all subsidiaries other than Washington Gas Light Company.
At December 31, 2013 and September 30, 2013, WGL and its subsidiaries had outstanding notes payable in the form of commercial paper from revolving credit facilities of $443.3 million and $373.1 million, respectively, at a weighted average interest rate of 0.18% and 0.19%, respectively. At December 31, 2013 and September 30, 2013, there were no outstanding bank loans from WGLs or Washington Gas revolving credit facilities.
NOTE 4. LONG-TERM DEBT
UNSECURED NOTES
Washington Gas issues unsecured Medium-Term Notes (MTNs) and private placement notes with individual terms regarding interest rates, maturities and call or put options. These notes can have maturity dates of one or more years from the date of issuance.
At December 31, 2013 and September 30, 2013, Washington Gas had the capacity under a shelf registration to issue up to $375.0 million and $450.0 million, respectively, of additional MTNs. At December 31, 2013 and September 30, 2013, outstanding MTNs and private placement notes were $621.0 million and $583.0 million at a weighted average interest rate of 5.86% and 5.91%, respectively.
The following table shows MTN and private placement issuances and retirements for the quarter ended December 31, 2013.
MTN and Private Placement Issuances and Retirements | ||||||||||||
($ In millions) | Principal | Interest Rate |
Nominal Maturity Date |
|||||||||
Quarter Ended December 31, 2013 |
||||||||||||
Issuances: |
||||||||||||
12/5/2013 |
$ | 75.0 | 5.00 | %(a) | 12/15/2043 | |||||||
Total |
$ | 75.0 | ||||||||||
Retirements: |
||||||||||||
11/7/2013 |
$ | 37.0 | 4.88 | % | 11/7/2013 | |||||||
Total |
$ | 37.0 | ||||||||||
(a)The estimated effective cost of the issued notes, including consideration of issuance fees and hedge costs, is 4.95%.
There were no MTN or private placement issuances or retirements for the year ended September 30, 2013.
14
WGL Holdings, Inc.
Washington Gas Light Company
Part IFinancial Information
Item 1Financial Statements (continued)
Notes to Consolidated Financial Statements (Unaudited)
NOTE 5. COMMON SHAREHOLDERS EQUITY
The tables below reflect the components of Common shareholders equity for WGL and Common shareholders equity for Washington Gas for the three months ended December 31, 2013.
WGL Holdings, Inc. | ||||||||||||||||||||
Components of Common Shareholders Equity | ||||||||||||||||||||
(In thousands) | Common Amount |
Paid-In Capital |
Retained Earnings |
Accumulated Other Comprehensive Loss, Net of Taxes |
Total | |||||||||||||||
Balance at September 30, 2013 |
$ | 574,461 | $ | 10,710 | $ | 700,422 | $ | (11,048 | ) | $ | 1,274,545 | |||||||||
Net income |
| | 18,959 | | 18,959 | |||||||||||||||
Other comprehensive income |
| | | 199 | 199 | |||||||||||||||
Dividends reinvestment |
1,503 | | | | 1,503 | |||||||||||||||
Stock-based compensation |
1,524 | (1,744 | ) | | | (220 | ) | |||||||||||||
Dividends declared: |
||||||||||||||||||||
Common stock |
| | (21,795 | ) | | (21,795 | ) | |||||||||||||
Preferred stock |
| | (330 | ) | | (330 | ) | |||||||||||||
Balance at December 31, 2013 |
$ | 577,488 | $ | 8,966 | $ | 697,256 | $ | (10,849 | ) | $ | 1,272,861 | |||||||||
Washington Gas Light Company | ||||||||||||||||||||
Components of Common Shareholders Equity | ||||||||||||||||||||
(In thousands) | Common Stock Amount |
Paid-In Capital |
Retained Earnings |
Accumulated Other Comprehensive Loss, Net of Taxes |
Total | |||||||||||||||
Balance at September 30, 2013 |
$ | 46,479 | $ | 477,968 | $ | 511,184 | $ | (11,048 | ) | $ | 1,024,583 | |||||||||
Net income |
| | 38,807 | | 38,807 | |||||||||||||||
Other comprehensive income |
| | | 199 | 199 | |||||||||||||||
Stock-based compensation |
| (266 | ) | | | (266 | ) | |||||||||||||
Dividends declared: |
||||||||||||||||||||
Common stock |
| | (19,075 | ) | | (19,075 | ) | |||||||||||||
Preferred stock |
| | (330 | ) | | (330 | ) | |||||||||||||
Balance at December 31, 2013 |
$ | 46,479 | $ | 477,702 | $ | 530,586 | $ | (10,849 | ) | $ | 1,043,918 | |||||||||
WGL had 51,841,665 and 51,774,204 shares issued of common stock at December 31, 2013 and September 30, 2013, respectively. Washington Gas had 46,479,536 shares issued of common stock at both December 31, 2013 and September 30, 2013.
NOTE 6. EARNINGS PER SHARE
Basic EPS is computed by dividing net income by the weighted average number of common shares outstanding during the reported period. Diluted EPS assumes the issuance of common shares pursuant to stock-based compensation plans at the beginning of the applicable period unless the effect of such issuance would be anti-dilutive. The following table reflects the computation of our basic and diluted EPS for the three months ended December 31, 2013 and 2012.
15
WGL Holdings, Inc.
Washington Gas Light Company
Part IFinancial Information
Item 1Financial Statements (continued)
Notes to Consolidated Financial Statements (Unaudited)
Basic and Diluted EPS | ||||||||||||
(in thousands, except per share data) |
Net Income Applicable to |
Shares | Per Share Amount |
|||||||||
Three Months Ended December 31, 2013 |
||||||||||||
Basic EPS |
$ | 18,629 | 51,816 | $ | 0.36 | |||||||
|
|
|||||||||||
Stock-based compensation plans |
| 11 | ||||||||||
Diluted EPS |
$ | 18,629 | 51,827 | $ | 0.36 | |||||||
|
||||||||||||
Three Months Ended December 31, 2012 |
||||||||||||
Basic EPS |
$ | 52,388 | 51,631 | $ | 1.01 | |||||||
|
|
|||||||||||
Stock-based compensation plans |
| 57 | ||||||||||
Diluted EPS |
$ | 52,388 | 51,688 | $ | 1.01 | |||||||
|
There were no anti-dilutive shares for the three months ended December 31, 2013 and December 31, 2012.
NOTE 7. INCOME TAXES
As of December 31, 2013 and September 30, 2013, our uncertain tax positions were approximately $25.6 million and $25.1 million, respectively, primarily due to the change in tax accounting for repairs. If the amounts of unrecognized tax benefits are eventually realized, it would not materially impact the effective tax rate. It is reasonably possible that the amount of the unrecognized tax benefit with respect to some of WGLs and Washington Gas uncertain tax positions will significantly increase or decrease in the next 12 months, however at this time an estimate of the range of reasonably possible outcomes cannot be determined.
Washington Gas recognizes any accrued interest associated with uncertain tax positions in interest expense and recognizes any accrued penalties associated with uncertain tax positions in other expenses in the statements of income. During the three months ended December 31, 2013 and 2012, we accrued no expense for interest on uncertain tax positions. At both December 31, 2013 and September 30, 2013, we had a total accrual of $0.1 million of interest expense related to uncertain tax positions included in other deferred credits in the accompanying balance sheets.
Washington Gas charged the Maryland portion of the Medicare Part D (Med D) regulatory asset to tax expense during the fiscal year ended September 30, 2012 based on positions taken by the Maryland Public Service Commission (PSC of MD) in Washington Gas rate case during that fiscal year that did not permit recovery. Washington Gas received an order during the three months ended December 31, 2013 in its recent rate case from the PSC of MD that will allow recovery of the Med D Regulatory Asset. Therefore, the tax benefit has been recognized to reinstate the regulatory asset which results in a decrease in the effective rate for the fiscal year ended September 30, 2014. Under ASC 740 Income Taxes, the full impact of this item is being recognized and makes a significant change to WGLs and Washington Gas effective tax rate for the three months ended December 31, 2013. The Med D adjustment results in an effective tax rate at December 31, 2013 of 22.4%, although WGL currently expects to have an effective tax rate of approximately 34.9% for the entire fiscal year ended September 30, 2014. The Med D adjustment results in an effective tax rate for Washington Gas of 30.9% at December 31, 2013, although Washington Gas currently expects to have an effective tax rate of approximately 35.0% for the entire fiscal year ended September 30, 2014.
NOTE 8. DERIVATIVE AND WEATHER-RELATED INSTRUMENTS
DERIVATIVE INSTRUMENTS
Regulated Utility Operations
Washington Gas enters into contracts related to the sale and purchase of natural gas that qualify as derivative instruments and are accounted for under ASC Topic 815. These derivative instruments are recorded at fair value on our balance sheet and Washington Gas does not designate any derivatives as hedges under ASC Topic 815. Washington Gas derivative instruments relate to: (i) Washington Gas asset optimization program; (ii) managing price risk associated with the purchase of gas to serve utility customers and (iii) managing interest rate risk.
16
WGL Holdings, Inc.
Washington Gas Light Company
Part IFinancial Information
Item 1Financial Statements (continued)
Notes to Consolidated Financial Statements (Unaudited)
Asset Optimization. Washington Gas optimizes the value of its long-term natural gas transportation and storage capacity resources during periods when these resources are not being used to physically serve utility customers. Specifically, Washington Gas utilizes its transportation capacity assets to benefit from favorable natural gas prices between different geographic locations and its storage capacity assets to benefit from favorable natural gas prices between different time periods. As part of this asset optimization program, Washington Gas enters into physical and financial derivative transactions in the form of forward, futures and option contracts with the primary objective of locking in operating margins that Washington Gas will ultimately realize. The derivatives used under this program are subject to mark-to-market accounting treatment while the capacity and transportation resources are not.
Regulatory sharing mechanisms allow the profit from these transactions to be shared between Washington Gas shareholders and customers; therefore, any changes in fair value are recorded through earnings, or as regulatory assets or liabilities to the extent that gains and losses associated with these derivative instruments will be included in the rates charged to customers when they are realized. Valuation changes for the portion of net profits to be retained for shareholders may cause significant period-to-period volatility in earnings from unrealized gains and losses. This volatility does not change the locked-in operating margins that Washington Gas expects to ultimately realize from these transactions through the use of its storage and transportation capacity resources.
All physically and financially settled contracts under our asset optimization program are reported on a net basis in the statements of income in Utility cost of gas. Total net margins recorded to Utility cost of gas after sharing and management fees associated with all asset optimization transactions for the three months ended December 31, 2013 was a loss of $19.8 million including an unrealized loss of $26.2 million. During the three months ended December 31, 2012 we recorded a loss of $5.0 million including an unrealized loss of $8.7 million.
Managing Price Risk. To manage price risk associated with acquiring natural gas supply for utility customers, Washington Gas enters into forward contracts, option contracts, financial contracts and other contracts, as authorized by its regulators. These instruments are accounted for as derivative instruments. Any gains and losses associated with these derivatives are recorded as regulatory liabilities or assets, respectively, to reflect the rate treatment for these economic hedging activities.
Managing Interest-Rate Risk. Washington Gas utilizes derivative instruments that are designed to minimize the risk of interest-rate volatility associated with planned issuances of debt securities. Any gains and losses associated with these types of derivatives are recorded as regulatory liabilities or assets, respectively, and amortized in accordance with regulatory requirements, typically over the life of the newly issued debt.
Non-Utility Operations
WGEServices enters into certain derivative contracts as part of managing the price risk associated with the sale and purchase of natural gas and electricity. WGL Midstream enters into derivative contracts for the purpose of optimizing its storage and transportation capacity as well as managing the transportation and storage assets on behalf of third parties. Washington Gas Resources has warrants to purchase stock from ASD Holdings, Inc., that are accounted for as derivative instruments. Derivative instruments are recorded at fair value on our consolidated balance sheets. As the storage and transportation capacity utilized by WGL Midstream are not considered to be derivative instruments, they are not recorded at fair value on our consolidated balance sheets. WGEServices, WGL Midstream and Washington Gas Resources do not designate these derivatives as hedges under ASC Topic 815; therefore, changes in the fair value of these derivative instruments are reflected in the earnings of our non-utility operations and may cause significant period-to-period volatility in earnings.
Consolidated Operations
Reflected in the tables below is information for WGL as well as Washington Gas. The information for WGL includes derivative instruments for both utility and non-utility operations.
17
WGL Holdings, Inc.
Washington Gas Light Company
Part IFinancial Information
Item 1Financial Statements (continued)
Notes to Consolidated Financial Statements (Unaudited)
At December 31, 2013 and September 30, 2013, respectively, the absolute notional amounts of our derivatives are as follows:
Absolute Notional Amounts
of Open Positions on Derivative Instruments
As of December 31, 2013 | Notional Amounts | |||||||
Derivative transactions | WGL Holdings, Inc. | Washington Gas Light Company |
||||||
Natural Gas (In millions of therms) |
||||||||
Asset optimization |
12,771.7 | 11,010.0 | ||||||
Retail sales |
83.0 | | ||||||
Other risk-management activities |
1,763.5 | 1,442.5 | ||||||
Electricity (In millions of kWhs) |
||||||||
Retail sales |
4,684.0 | | ||||||
Other risk-management activities |
19,151.0 | | ||||||
Warrants (In millions of shares) |
4.6 | |
Absolute Notional Amounts
of Open Positions on Derivative Instruments
As of September 30, 2013 | Notional Amounts | |||||||
Derivative transactions | WGL Holdings, Inc. | Washington Gas Light Company |
||||||
Natural Gas (In millions of therms) |
||||||||
Asset optimization |
13,289.6 | 11,115.8 | ||||||
Retail sales |
98.9 | | ||||||
Other risk-management activities |
1,803.6 | 1,455.7 | ||||||
Electricity (In millions of kWhs) |
||||||||
Retail sales |
4,790.2 | | ||||||
Other risk-management activities |
17,647.9 | | ||||||
Warrants (In millions of shares) |
4.6 | | ||||||
Interest Rate Swaps (In millions of dollars)(a) |
75.0 | 75.0 |
(a) The fair value of our interest rate swaps was minimal at 9/30/13.
18
WGL Holdings, Inc.
Washington Gas Light Company
Part IFinancial Information
Item 1Financial Statements (continued)
Notes to Consolidated Financial Statements (Unaudited)
The following tables present the balance sheet classification for all derivative instruments as of December 31, 2013 and September 30, 2013.
WGL Holdings, Inc.
Balance Sheet Classification of Derivative Instruments
(In millions) | ||||||||||||||||
As of December 31, 2013 | Gross Derivative Assets |
Gross Derivative Liabilities |
Netting of Collateral |
Total(a) | ||||||||||||
Current Assets Derivatives |
$ | 35.6 | $ | (12.1 | ) | $ | | $ | 23.5 | |||||||
Deferred Charges and Other Assets Derivatives |
9.2 | | | 9.2 | ||||||||||||
Accounts Payable and Other Accrued Liabilities |
0.4 | | | 0.4 | ||||||||||||
Current Liabilities Derivatives |
10.3 | (54.2 | ) | 2.5 | (41.4 | ) | ||||||||||
Deferred Credits Derivatives |
27.5 | (275.7 | ) | 2.6 | (245.6 | ) | ||||||||||
Total |
$ | 83.0 | $ | (342.0 | ) | $ | 5.1 | $ | (253.9 | ) | ||||||
As of September 30, 2013 |
||||||||||||||||
Current Assets Derivatives |
$ | 57.3 | $ | (19.3 | ) | $ | (2.7 | ) | $ | 35.3 | ||||||
Deferred Charges and Other Assets Derivatives |
57.4 | (31.1 | ) | | 26.3 | |||||||||||
Accounts Payable and Other Accrued Liabilities |
1.5 | | | 1.5 | ||||||||||||
Current Liabilities Derivatives |
4.1 | (53.4 | ) | 0.9 | (48.4 | ) | ||||||||||
Deferred Credits Derivatives |
| (144.0 | ) | 2.7 | (141.3 | ) | ||||||||||
Total |
$ | 120.3 | $ | (247.8 | ) | $ | 0.9 | $ | (126.6 | ) | ||||||
Washington Gas Light Company Balance Sheet Classification of Derivative Instruments |
||||||||||||||||
(In millions) | ||||||||||||||||
As of December 31, 2013 | Gross Derivative Assets |
Gross Derivative Liabilities |
Netting of Collateral |
Total(a) | ||||||||||||
Current Assets Derivatives |
$ | 10.9 | $ | (4.7 | ) | $ | | $ | 6.2 | |||||||
Deferred Charges and Other Assets Derivatives |
| | | | ||||||||||||
Current Liabilities Derivatives |
7.4 | (34.1 | ) | | (26.7 | ) | ||||||||||
Deferred Credits Derivatives |
27.2 | (215.8 | ) | | (188.6 | ) | ||||||||||
Total |
$ | 45.5 | $ | (254.6 | ) | $ | | $ | (209.1 | ) | ||||||
As of September 30, 2013 |
||||||||||||||||
Current Assets Derivatives |
$ | 19.3 | $ | (12.3 | ) | $ | (2.7 | ) | $ | 4.3 | ||||||
Deferred Charges and Other Assets Derivatives |
47.2 | (31.1 | ) | | 16.1 | |||||||||||
Current Liabilities Derivatives |
1.5 | (26.2 | ) | | (24.7 | ) | ||||||||||
Deferred Credits Derivatives |
| (106.1 | ) | | (106.1 | ) | ||||||||||
Total |
$ | 68.0 | $ | (175.7 | ) | $ | (2.7 | ) | $ | (110.4 | ) | |||||
(a)WGL has elected to offset the fair value of recognized derivative instruments against the right to reclaim or the obligation to return collateral for derivative instruments executed under the same master netting arrangement in accordance with ASC 815. All recognized derivative contracts and associated financial collateral subject to a master netting arrangement or similar that is eligible for offset under ASC 815 have been presented net in the balance sheet.
19
WGL Holdings, Inc.
Washington Gas Light Company
Part IFinancial Information
Item 1Financial Statements (continued)
Notes to Consolidated Financial Statements (Unaudited)
The following table presents all gains and losses associated with derivative instruments for the three months ended December 31, 2013 and 2012.
Gains and Losses on Derivative Instruments
(In millions) | WGL Holdings, Inc. | Washington Gas Light Company |
||||||||||||||
Three Months Ended December 31, |
2013 | 2012 | 2013 | 2012 | ||||||||||||
Recorded to income |
||||||||||||||||
Operating revenuesnon-utility |
$ | (48.5 | ) | $ | 12.2 | $ | | $ | | |||||||
Utility cost of gas |
(27.3 | ) | (7.2 | ) | (27.3 | ) | (7.2 | ) | ||||||||
Non-utility cost of energy-related sales |
16.3 | (7.5 | ) | | | |||||||||||
Other income-net |
0.1 | 0.1 | | | ||||||||||||
Recorded to regulatory assets |
||||||||||||||||
Gas costs |
(78.3 | ) | (11.9 | ) | (78.3 | ) | (11.9 | ) | ||||||||
Total |
$ | (137.7 | ) | $ | (14.3 | ) | $ | (105.6 | ) | $ | (19.1 | ) | ||||
Collateral
WGL utilizes standardized master netting agreements, which facilitate the netting of cash flows into a single net exposure for a given counterparty. As part of these master netting agreements, cash, letters of credit, and parental guarantees may be required to be posted to or obtained from counterparties in order to mitigate credit risk related to both derivative and non-derivative positions. Under WGLs offsetting policy, collateral balances are offset against the related counterparties derivative positions to the extent the application would not result in the over-collateralization of those derivative positions on the balance sheet. At December 31, 2013, Washington Gas, WGEServices and WGL Midstream posted $3.8 million, $12.6 million and $9.6 million, respectively, of collateral deposits with counterparties that were not offset against open and settled derivative contracts. At September 30, 2013, Washington Gas, WGEServices and WGL Midstream posted $3.0 million, $12.1 million and $8.1 million, respectively, of collateral deposits with counterparties that were not offset against open and settled derivative contracts. In addition, at December 31, 2013 and September 30, 2013, Washington Gas held $10.2 million and $4.6 million, respectively of cash collateral representing an obligation to counterparties that was not offset against open and settled derivative contracts. Any collateral posted that is not offset against open and settled derivative contracts is included in Other prepayments in the accompanying balance sheet. Collateral received and not offset against open and settled derivative contracts is included in Customer deposits and advance payments in the accompanying balance sheet.
Certain derivative instruments of Washington Gas, WGEServices and WGL Midstream contain contract provisions that require collateral to be posted if the credit rating of WGL falls below certain levels or if counterparty exposure to WGEServices or WGL Midstream exceeds a certain level. Due to counterparty exposure levels, at December 31, 2013, WGEServices posted $5.1 million of collateral related to its derivative liabilities that contained credit-related contingent features. At September 30, 2013, WGEServices posted $3.6 million of collateral related to these aforementioned derivative liabilities. Washington Gas and WGL Midstream were not required to post any collateral related to its derivative liabilities that contained credit-related contingent features at December 31, 2013 or September 30, 2013. The following table shows the aggregate fair value of all derivative instruments with credit-related contingent features that are in a liability position, as well as the maximum amount of collateral that would be required if the most intrusive credit-risk-related contingent features underlying these agreements were triggered on December 31, 2013 and September 30, 2013, respectively.
Potential Collateral Requirements for Derivative Liabilities
with Credit-risk-Contingent Features
(In millions) | WGL Holdings, Inc. | Washington Gas Light Company |
||||||
December 31, 2013 |
||||||||
Derivative liabilities with credit-risk-contingent features |
$ | 63.5 | $ | 38.0 | ||||
Maximum potential collateral requirements |
27.0 | 3.9 | ||||||
September 30, 2013 |
||||||||
Derivative liabilities with credit-risk-contingent features |
$ | 77.0 | $ | 44.7 | ||||
Maximum potential collateral requirements |
33.6 | 1.7 |
Washington Gas, WGEServices and WGL Midstream do not enter into derivative contracts for speculative purposes.
20
WGL Holdings, Inc.
Washington Gas Light Company
Part IFinancial Information
Item 1Financial Statements (continued)
Notes to Consolidated Financial Statements (Unaudited)
Concentration of Credit Risk
We are exposed to credit risk from derivative instruments that reflect certain agreements with wholesale counterparties. Our credit policies are designed to mitigate this credit risk by requiring credit enhancements including, but not limited to, letters of credit, parent guarantees and cash collateral when deemed necessary. For certain counterparties or their guarantors that meet our specified creditworthiness criteria, Washington Gas, WGEServices and WGL Midstream grant unsecured credit, which we continuously monitor. Additionally, Washington Gas, WGEServices and WGL Midstream have separate agreements with wholesale counterparties that contain netting provisions to allow offsetting of the receivable and payable exposure related to each counterparty. At December 31, 2013, two counterparties represented over 10% of Washington Gas credit exposure to wholesale derivative counterparties for a total credit risk of $4.4 million; four counterparties represented over 10% of WGEServices credit exposure to wholesale counterparties for a total credit risk of $0.7 million; and two counterparties represented over 10% of WGL Midstreams credit exposure to wholesale counterparties for a total credit risk of $11.0 million.
WEATHER-RELATED INSTRUMENTS
Washington Gas did not use any weather-related instruments during the three months ended December 31, 2013. During the three months ended December 31, 2012, Washington Gas used Heating Degree Day (HDD) weather-related instruments to manage its financial exposure to variations from normal weather in the District of Columbia. Under these contracts, Washington Gas purchased protection against net revenue shortfalls due to warmer-than-normal weather and sold to its counterparty the right to receive the benefit when weather is colder than normal. Washington Gas elected to value all weather-related instruments at fair value.
Gains and losses associated with Washington Gas weather-related instruments are recorded to Operation and maintenance expense. During the three months ended December 31, 2012, Washington Gas recorded a pre-tax net gain of $0.6 million related to weather instruments.
WGEServices utilizes weather-related instruments for managing the financial effects of weather risks. These instruments cover a portion of WGEServices estimated revenue or energy-related cost exposure to variations in heating or cooling degree days. These contracts provide for payment to WGEServices of a fixed-dollar amount for every degree day over or under specific levels during the calculation period depending upon the type of contract executed. For the three months ended December 31, 2013 and December 31, 2012, WGEServices recorded a pre-tax loss of $1.1 million and a pre-tax gain of $0.4 million, respectively, related to these contracts.
NOTE 9. FAIR VALUE MEASUREMENTS
Recurring Basis
We measure the fair value of our financial assets and liabilities using a combination of the income and market approach in accordance with ASC Topic 820. These financial assets and liabilities primarily consist of (i) derivatives recorded on our balance sheet under ASC Topic 815, (ii) weather-related instruments and (iii) short-term investments, commercial paper and long-term debt outstanding required to be disclosed at fair value. Under ASC Topic 820, fair value is defined as the exit price, representing the amount that would be received in the sale of an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. To value our financial instruments, we use market data or assumptions that market participants would use, including assumptions about credit risk (both our own credit risk and the counterpartys credit risk) and the risks inherent in the inputs to valuation.
We enter into derivative contracts in the futures and over-the-counter (OTC) wholesale and retail markets. These markets are the principal markets for the respective wholesale and retail contracts. Our relevant market participants are our existing counterparties and others who have participated in energy transactions at our delivery points. These participants have access to the same market data as WGL. We value our derivative contracts based on an in-exchange premise, and valuations are generally based on pricing service data or indicative broker quotes depending on the market location. We measure the net credit exposure at the counterparty level where the right to set-off exists. The net exposure is determined using the mark-to-market exposure adjusted for collateral, letters of credit and parent guarantees. We use published default rates from Standard & Poors Ratings Services and Moodys Investors Service as inputs for determining credit adjustments.
21
WGL Holdings, Inc.
Washington Gas Light Company
Part IFinancial Information
Item 1Financial Statements (continued)
Notes to Consolidated Financial Statements (Unaudited)
ASC Topic 820 establishes a fair value hierarchy that prioritizes the inputs used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities and the lowest priority to unobservable inputs. The three levels of the fair value hierarchy under ASC Topic 820 are described below:
Level 1. Level 1 of the fair value hierarchy consists of assets or liabilities that are valued using observable inputs based upon unadjusted quoted prices in active markets for identical assets or liabilities at the reporting date. Level 1 assets and liabilities primarily include exchange traded derivatives and securities.
Level 2. Level 2 of the fair value hierarchy consists of assets or liabilities that are valued using directly or indirectly observable inputs either corroborated with market data or based on exchange traded market data. Level 2 includes fair values based on industry-standard valuation techniques that consider various assumptions: (i) quoted forward prices, including the use of mid-market pricing within a bid/ask spread; (ii) discount rates; (iii) implied volatility and (iv) other economic factors. Substantially all of these assumptions are observable throughout the full term of the instrument, can be derived from observable data or are supported by observable levels at which transactions are executed in the relevant market. At December 31, 2013 and September 30, 2013, Level 2 financial assets and liabilities included energy-related derivatives such as financial contracts, options and physical forward contracts for deliveries at active market locations.
Level 3. Level 3 of the fair value hierarchy consists of assets or liabilities that are valued using significant unobservable inputs at the reporting date. These unobservable assumptions reflect our assumptions about estimates that market participants would use in pricing the asset or liability, including natural gas basis prices, annualized volatilities of natural gas prices, and electricity congestion prices. A significant change to any one of these inputs in isolation could result in a significant upward or downward fluctuation in the fair value measurement. These inputs may be used with industry standard valuation methodologies that result in our best estimate of fair value for the assets or liabilities at the reporting date.
Our Risk Analysis and Mitigation (RA&M) Group determines the valuation policies and procedures. The RA&M Group reports to WGLs Chief Financial Officer. In accordance with WGLs valuation policy, we may utilize a variety of valuation methodologies to fair value Level 3 derivative contracts including internally developed valuation inputs and pricing models. The prices used in our valuations are corroborated using multiple pricing sources, and we periodically conduct assessments to determine whether each valuation model is appropriate for its intended purpose. The RA&M Group also evaluates changes in fair value measurements on a daily basis.
At December 31, 2013 and September 30, 2013, Level 3 derivative assets and liabilities included: (i) physical contracts valued with significant basis adjustments to observable market data when delivery is to inactive market locations; (ii) long-dated positions where observable pricing is not available over the life of the contract; (iii) contracts valued using historical volatility assumptions; (iv) valuations using indicative broker quotes for inactive market locations and (v) non-publicly traded stock warrants.
22
WGL Holdings, Inc.
Washington Gas Light Company
Part IFinancial Information
Item 1Financial Statements (continued)
Notes to Consolidated Financial Statements (Unaudited)
The following tables set forth financial instruments recorded at fair value as of December 31, 2013 and September 30, 2013, respectively. A financial instruments classification within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement. Our assessment of the significance of a particular input to the fair value measurement requires judgment, and may affect the valuation of fair value assets and liabilities and their placement within the fair value hierarchy.
WGL Holdings, Inc. | ||||||||||||||||
Fair Value Measurements Under the Fair Value Hierarchy | ||||||||||||||||
(In millions) | Level 1 | Level 2 | Level 3 | Total | ||||||||||||
At December 31, 2013 |
||||||||||||||||
Assets |
||||||||||||||||
Natural gas related derivatives |
$ | | $ | 44.2 | $ | 17.7 | $ | 61.9 | ||||||||
Electricity related derivatives |
| 0.1 | 19.8 | 19.9 | ||||||||||||
Warrants |
| | 1.2 | 1.2 | ||||||||||||
Total Assets |
$ | | $ | 44.3 | $ | 38.7 | $ | 83.0 | ||||||||
Liabilities |
||||||||||||||||
Natural gas related derivatives |
$ | | $ | (34.2 | ) | $ | (282.2 | ) | $ | (316.4 | ) | |||||
Electricity related derivatives |
| (4.1 | ) | (21.5 | ) | (25.6 | ) | |||||||||
Total Liabilities |
$ | | $ | (38.3 | ) | $ | (303.7 | ) | $ | (342.0 | ) | |||||
At September 30, 2013 |
||||||||||||||||
Assets |
||||||||||||||||
Natural gas related derivatives |
$ | | $ | 72.3 | $ | 21.5 | $ | 93.8 | ||||||||
Electricity related derivatives |
| | 25.4 | 25.4 | ||||||||||||
Warrants |
| | 1.1 | 1.1 | ||||||||||||
Total Assets |
$ | | $ | 72.3 | $ | 48.0 | $ | 120.3 | ||||||||
Liabilities |
||||||||||||||||
Natural gas related derivatives |
$ | | $ | (41.1 | ) | $ | (176.7 | ) | $ | (217.8 | ) | |||||
Electricity related derivatives |
| (7.0 | ) | (23.0 | ) | (30.0 | ) | |||||||||
Total Liabilities |
$ | | $ | (48.1 | ) | $ | (199.7 | ) | $ | (247.8 | ) | |||||
23
WGL Holdings, Inc.
Washington Gas Light Company
Part IFinancial Information
Item 1Financial Statements (continued)
Notes to Consolidated Financial Statements (Unaudited)
Washington Gas Light Company
Fair Value Measurements Under the Fair Value Hierarchy
(In millions) | Level 1 | Level 2 | Level 3 | Total | ||||||||||||
At December 31, 2013 |
||||||||||||||||
Assets |
||||||||||||||||
Natural gas related derivatives |
$ | | $ | 30.6 | $ | 14.9 | $ | 45.5 | ||||||||
Total Assets | $ | | $ | 30.6 | $ | 14.9 | $ | 45.5 | ||||||||
Liabilities |
||||||||||||||||
Natural gas related derivatives |
$ | | $ | (19.7 | ) | $ | (234.9 | ) | $ | (254.6 | ) | |||||
Total Liabilities | $ | | $ | (19.7 | ) | $ | (234.9 | ) | $ | (254.6 | ) | |||||
At September 30, 2013 |
||||||||||||||||
Assets |
||||||||||||||||
Natural gas related derivatives |
$ | | $ | 51.0 | $ | 17.0 | $ | 68.0 | ||||||||
Total Assets | $ | | $ | 51.0 | $ | 17.0 | $ | 68.0 | ||||||||
Liabilities |
||||||||||||||||
Natural gas related derivatives |
$ | | $ | (25.1 | ) | $ | (150.6 | ) | $ | (175.7 | ) | |||||
Total Liabilities | $ | | $ | (25.1 | ) | $ | (150.6 | ) | $ | (175.7 | ) | |||||
24
WGL Holdings, Inc.
Washington Gas Light Company
Part IFinancial Information
Item 1Financial Statements (continued)
Notes to Consolidated Financial Statements (Unaudited)
The following table includes quantitative information about the significant unobservable inputs used in the fair value measurement of our Level 3 financial instruments and the respective fair values of the net derivative asset and liability positions, by contract type, as of December 31, 2013 and September 30, 2013.
Quantitative Information about Level 3 Fair Value Measurements | ||||||||
Net Fair Value December 31, 2013 |
Valuation Techniques | Unobservable Inputs | Range | |||||
WGL Holdings, Inc. | (In millions) | |||||||
Natural gas related derivatives |
($264.5) | Discounted Cash Flow | Natural Gas Basis Price (per dekatherm) |
($1.594) - $3.205 | ||||
Option Model | Natural Gas Basis Price (per dekatherm) |
($0.372) - $1.545 | ||||||
Annualized Volatility of Spot Market Natural Gas | 34.6% - 276.6% | |||||||
Electricity related derivatives |
($1.7) | Discounted Cash Flow | Electricity Congestion Price (per megawatt hour) |
($1.888) - $66.200 | ||||
Load-Shaping Option Model | Electricity Congestion Price (per megawatt hour) |
$31.965 - $71.186 | ||||||
Washington Gas Light Company |
||||||||
Natural gas related derivatives |
($220.0) | Discounted Cash Flow | Natural Gas Basis Price (per dekatherm) |
($1.594) - $3.205 | ||||
Option Model | Natural Gas Basis Price (per dekatherm) |
$0.027 - $1.545 | ||||||
Annualized Volatility of Spot Market Natural Gas | 46.8% - 276.6% |
25
WGL Holdings, Inc.
Washington Gas Light Company
Part IFinancial Information
Item 1Financial Statements (continued)
Notes to Consolidated Financial Statements (Unaudited)
Quantitative Information about Level 3 Fair Value Measurements | ||||||||
Net Fair Value September 30, 2013 |
Valuation Techniques | Unobservable Inputs | Range | |||||
WGL Holdings, Inc. | (In millions) | |||||||
Natural gas related derivatives |
($155.2) | Discounted Cash Flow | Natural Gas Basis Price (per dekatherm) |
($1.780) - $2.205 | ||||
Option Model | Natural Gas Basis Price (per dekatherm) |
($0.181) - $0.628 | ||||||
Annualized Volatility of Spot Market Natural Gas | 34.6% - 276.6% | |||||||
Electricity related derivatives |
$2.4 | Discounted Cash Flow | Electricity Congestion Price (per megawatt hour) |
($1.995) - $64.15 | ||||
Washington Gas Light Company |
||||||||
Natural gas related derivatives |
($133.6) | Discounted Cash Flow | Natural Gas Basis Price (per dekatherm) |
($1.780) - $2.205 | ||||
Option Model | Natural Gas Basis Price (per dekatherm) |
$0.024 - $0.628 | ||||||
Annualized Volatility of Spot Market Natural Gas | 46.8% - 276.6% |
The following tables are a summary of the changes in the fair value of our derivative instruments that are measured at net fair value on a recurring basis in accordance with ASC Topic 820 using significant Level 3 inputs during the three months ended December 31, 2013 and 2012, respectively.
WGL Holdings, Inc. Reconciliation of Fair Value Measurements Using Significant Level 3 Inputs |
| |||||||||||||||||||
(In millions) | Natural Gas Related Derivatives |
Electricity Related Derivatives |
Weather Related Instruments |
Warrants | Total | |||||||||||||||
Three Months Ended December 31, 2013 |
|
|||||||||||||||||||
Balance at October 1, 2013 |
$ | (155.2 | ) | $ | 2.4 | $ | | $ | 1.1 | $ | (151.7 | ) | ||||||||
Realized and unrealized gains (losses) |
||||||||||||||||||||
Recorded to income |
(46.7 | ) | (7.9 | ) | | 0.1 | (54.5 | ) | ||||||||||||
Recorded to regulatory assets gas costs |
(72.0 | ) | | | | (72.0 | ) | |||||||||||||
Purchases |
| 1.4 | | | 1.4 | |||||||||||||||
Settlements |
9.4 | 2.4 | | | 11.8 | |||||||||||||||
Balance at December 31, 2013 |
$ | (264.5 | ) | $ | (1.7 | ) | $ | | $ | 1.2 | $ | (265.0 | ) | |||||||
26
WGL Holdings, Inc.
Washington Gas Light Company
Part IFinancial Information
Item 1Financial Statements (continued)
Notes to Consolidated Financial Statements (Unaudited)
WGL Holdings, Inc. Reconciliation of Fair Value Measurements Using Significant Level 3 Inputs |
| |||||||||||||||||||
(In millions) | Natural Gas Related Derivatives |
Electricity Related Derivatives |
Weather Related Instruments |
Warrants | Total | |||||||||||||||
Three Months Ended December 31, 2012 |
||||||||||||||||||||
Balance at October 1, 2012 |
$ | 39.6 | $ | 2.8 | $ | (0.5 | ) | $ | 0.9 | $ | 42.8 | |||||||||
Realized and unrealized gains (losses) |
||||||||||||||||||||
Recorded to income |
(8.6 | ) | (10.9 | ) | 0.6 | 0.1 | (18.8 | ) | ||||||||||||
Recorded to regulatory assets gas costs |
(12.1 | ) | | | | (12.1 | ) | |||||||||||||
Purchases |
| 2.5 | | | 2.5 | |||||||||||||||
Settlements |
2.6 | 10.2 | | | 12.8 | |||||||||||||||
Balance at December 31, 2012 |
$ | 21.5 | $ | 4.6 | $ | 0.1 | $ | 1.0 | $ | 27.2 | ||||||||||
Washington Gas Light Company Reconciliation of Fair Value Measurements Using Significant Level 3 Inputs |
| |||||||||||||||||||
(In millions) | Natural Gas Related Derivatives |
Electricity Related Derivatives |
Weather Related Instruments |
Warrants | Total | |||||||||||||||
Three Months Ended December 31, 2013 |
||||||||||||||||||||
Balance at October 1, 2013 |
$ | (133.6 | ) | $ | | $ | | $ | | $ | (133.6 | ) | ||||||||
Realized and unrealized gains (losses) |
||||||||||||||||||||
Recorded to income |
(23.4 | ) | | | | (23.4 | ) | |||||||||||||
Recorded to regulatory assets gas costs |
(72.0 | ) | | | | (72.0 | ) | |||||||||||||
Settlements |
9.0 | | | | 9.0 | |||||||||||||||
Balance at December 31, 2013 |
$ | (220.0 | ) | $ | | $ | | $ | | $ | (220.0 | ) | ||||||||
Washington Gas Light Company
Reconciliation of Fair Value Measurements Using Significant Level 3 Inputs
(In millions) | Natural Gas Related Derivatives |
Electricity Related Derivatives |
Weather Related Instruments |
Warrants | Total | |||||||||||||||
Three Months Ended December 31, 2012 |
||||||||||||||||||||
Balance at October 1, 2012 |
$ | 35.6 | $ | | $ | (0.5 | ) | $ | | $ | 35.1 | |||||||||
Realized and unrealized gains (losses) |
||||||||||||||||||||
Recorded to income |
(7.7 | ) | | 0.6 | | (7.1 | ) | |||||||||||||
Recorded to regulatory assets gas costs |
(12.1 | ) | | | | (12.1 | ) | |||||||||||||
Settlements |
2.0 | | | | 2.0 | |||||||||||||||
Balance at December 31, 2012 |
$ | 17.8 | $ | | $ | 0.1 | $ | | $ | 17.9 | ||||||||||
Transfers between different levels of the fair value hierarchy may occur based on the level of observable inputs used to value the instruments from period to period. It is our policy to show both transfers into and out of the different levels of the
27
WGL Holdings, Inc.
Washington Gas Light Company
Part IFinancial Information
Item 1Financial Statements (continued)
Notes to Consolidated Financial Statements (Unaudited)
fair value hierarchy at the fair value as of the beginning of the reporting period. There were no transfers in or out of Level 3 for the three months ended December 31, 2013 or 2012 for WGL or Washington Gas.
The table below sets forth the line items on the statements of income to which amounts are recorded for the three months ended December 31, 2013 and 2012, respectively, related to fair value measurements using significant Level 3 inputs.
WGL Holdings, Inc. Realized and Unrealized Gains (Losses) Recorded to Income for Level 3 Measurements |
| |||||||||||||||||||
Three Months Ended December 31, 2013 | ||||||||||||||||||||
(In millions) | Natural Gas Related Derivatives |
Electricity Related Derivatives |
Weather Related Instruments |
Warrants | Total | |||||||||||||||
Operating revenues non-utility |
$ | (25.8 | ) | $ | (10.0 | ) | $ | | $ | | $ | (35.8 | ) | |||||||
Utility cost of gas |
(23.4 | ) | | | | (23.4 | ) | |||||||||||||
Other income-net |
| | | 0.1 | 0.1 | |||||||||||||||
Non-utility cost of energy-related sales |
2.5 | 2.1 | | | 4.6 | |||||||||||||||
Total |
$ | (46.7 | ) | $ | (7.9 | ) | $ | | $ | 0.1 | $ | (54.5 | ) | |||||||
WGL Holdings, Inc.
Realized and Unrealized Gains (Losses) Recorded to Income for Level 3 Measurements
Three Months Ended December 31, 2012 | ||||||||||||||||||||
(In millions) | Natural Gas Related Derivatives |
Electricity Related Derivatives |
Weather Related Instruments |
Warrants | Total | |||||||||||||||
Operating revenues non-utility |
$ | (0.5 | ) | $ | (1.1 | ) | $ | | $ | | $ | (1.6 | ) | |||||||
Utility cost of gas |
(7.7 | ) | | | | (7.7 | ) | |||||||||||||
Other income-net |
| | | 0.1 | 0.1 | |||||||||||||||
Non-utility cost of energy-related sales |
(0.4 | ) | (9.8 | ) | | | (10.2 | ) | ||||||||||||
Operation and maintenance expense |
| | 0.6 | | 0.6 | |||||||||||||||
Total |
$ | (8.6 | ) | $ | (10.9 | ) | $ | 0.6 | $ | 0.1 | $ | (18.8 | ) | |||||||
Washington Gas Light Company Realized and Unrealized Gains (Losses) Recorded to Income for Level 3 Measurements |
| |||||||||||||||||||
Three Months Ended December 31, 2013 | ||||||||||||||||||||
(In millions) | Natural Gas Related Derivatives |
Electricity Related Derivatives |
Weather Related Instruments |
Warrants | Total | |||||||||||||||
Utility cost of gas |
$ | (23.4 | ) | $ | | $ | | $ | | $ | (23.4 | ) | ||||||||
Total |
$ | (23.4 | ) | $ | | $ | | $ | | $ | (23.4 | ) | ||||||||
28
WGL Holdings, Inc.
Washington Gas Light Company
Part IFinancial Information
Item 1Financial Statements (continued)
Notes to Consolidated Financial Statements (Unaudited)
Washington Gas Light Company Realized and Unrealized Gains (Losses) Recorded to Income for Level 3 Measurements |
| |||||||||||||||||||
Three Months Ended December 31, 2012 | ||||||||||||||||||||
(In millions) | Natural Gas Related Derivatives |
Electricity Related Derivatives |
Weather Related Instruments |
Warrants | Total | |||||||||||||||
Utility cost of gas |
$ | (7.7 | ) | $ | | $ | | $ | | $ | (7.7 | ) | ||||||||
Operation and maintenance expense |
| | 0.6 | | 0.6 | |||||||||||||||
Total |
$ | (7.7 | ) | $ | | $ | 0.6 | $ | | $ | (7.1 | ) | ||||||||
Unrealized gains (losses) attributable to derivative assets and liabilities measured using significant Level 3 inputs were recorded as follows, for the three months ended December 31, 2013 and 2012, respectively.
WGL Holdings, Inc. Unrealized Gains (Losses) Recorded for Level 3 Measurements |
| |||||||||||||||||||
Three Months Ended December 31, 2013 | ||||||||||||||||||||
(In millions) | Natural Gas Related Derivatives |
Electricity Related Derivatives |
Weather Related Instruments |
Warrants | Total | |||||||||||||||
Recorded to income |
||||||||||||||||||||
Operating revenues non-utility |
$ | (25.2 | ) | $ | (5.0 | ) | $ | | $ | | $ | (30.2 | ) | |||||||
Utility cost of gas |
(22.9 | ) | | | | (22.9 | ) | |||||||||||||
Non-utility cost of energy-related sales |
2.3 | 1.0 | | | 3.3 | |||||||||||||||
Other income net |
| | | 0.1 | 0.1 | |||||||||||||||
Recorded to regulatory assets gas costs |
(71.1 | ) | | | | (71.1 | ) | |||||||||||||
Total |
$ | (116.9 | ) | $ | (4.0 | ) | $ | | $ | 0.1 | $ | (120.8 | ) | |||||||
WGL Holdings, Inc. Unrealized Gains (Losses) Recorded for Level 3 Measurements |
| |||||||||||||||||||
Three Months Ended December 31, 2012 | ||||||||||||||||||||
(In millions) | Natural Gas Related Derivatives |
Electricity Related Derivatives |
Weather Related Instruments |
Warrants | Total | |||||||||||||||
Recorded to income |
||||||||||||||||||||
Operating revenues non-utility |
$ | 0.3 | $ | 4.3 | $ | | $ | | $ | 4.6 | ||||||||||
Utility cost of gas |
(7.5 | ) | | | | (7.5 | ) | |||||||||||||
Non-utility cost of energy-related sales |
0.6 | 9.2 | | | 9.8 | |||||||||||||||
Other income-net |
| | | 0.1 | 0.1 | |||||||||||||||
Operation and maintenance expense |
| | 0.6 | | 0.6 | |||||||||||||||
Recorded to regulatory assets gas costs |
(11.9 | ) | | | | (11.9 | ) | |||||||||||||
Total |
$ | (18.5 | ) | $ | 13.5 | $ | 0.6 | $ | 0.1 | $ | (4.3 | ) | ||||||||
29
WGL Holdings, Inc.
Washington Gas Light Company
Part IFinancial Information
Item 1Financial Statements (continued)
Notes to Consolidated Financial Statements (Unaudited)
Washington Gas Light Company Unrealized Gains (Losses) Recorded for Level 3 Measurements |
| |||||||||||||||||||
Three Months Ended December 31, 2013 | ||||||||||||||||||||
(In millions) | Natural Gas Related Derivatives |
Electricity Related Derivatives |
Weather Related Instruments |
Warrants | Total | |||||||||||||||
Recorded to income |
||||||||||||||||||||
Utility cost of gas |
$ | (22.9 | ) | $ | | $ | | $ | | $ | (22.9 | ) | ||||||||
Recorded to regulatory assets gas costs |
(71.1 | ) | | | | (71.1 | ) | |||||||||||||
Total |
$ | (94.0 | ) | $ | | $ | | $ | | $ | (94.0 | ) | ||||||||
Washington Gas Light Company Unrealized Gains (Losses) Recorded for Level 3 Measurements |
| |||||||||||||||||||
Three Months Ended December 31, 2012 | ||||||||||||||||||||
(In millions) | Natural Gas Related Derivatives |
Electricity Related Derivatives |
Weather Related Instruments |
Warrants | Total | |||||||||||||||
Recorded to income |
||||||||||||||||||||
Utility cost of gas |
$ | (7.5 | ) | $ | | $ | | $ | | $ | (7.5 | ) | ||||||||
Operation and maintenance expense |
| | 0.6 | | 0.6 | |||||||||||||||
Recorded to regulatory assets gas costs |
(11.9 | ) | | | | (11.9 | ) | |||||||||||||
Total |
$ | (19.4 | ) | $ | | $ | 0.6 | $ | | $ | (18.8 | ) | ||||||||
30
WGL Holdings, Inc.
Washington Gas Light Company
Part IFinancial Information
Item 1Financial Statements (continued)
Notes to Consolidated Financial Statements (Unaudited)
The following table presents the carrying amounts and estimated fair values of our financial instruments at December 31, 2013 and September 30, 2013.
WGL Holdings, Inc. Fair Value of Financial Instruments |
| |||||||||||||||
December 31, 2013 |
September 30, 2013 |
|||||||||||||||
(In millions) | Carrying Amount |
Fair Value |
Carrying Amount |
Fair Value |
||||||||||||
Money market funds(a) |
$ | 6.8 | $ | 6.8 | $ | 6.5 | $ | 6.5 | ||||||||
Other short-term investments(a) |
$ | 0.2 | $ | 0.2 | $ | 0.1 | $ | 0.1 | ||||||||
Commercial paper (b) |
$ | 443.3 | $ | 443.3 | $ | 373.1 | $ | 373.1 | ||||||||
Long-term debt(c) |
$ | 599.3 | $ | 688.7 | $ | 524.1 | $ | 630.2 | ||||||||
Washington Gas Light Company
Fair Value of Financial Instruments
|
December 31, 2013 |
|
|
September 30, 2013 |
| |||||||||||
(In millions) | Carrying Amount |
Fair Value |
Carrying Amount |
Fair Value |
||||||||||||
Money market funds(a) |
$ | 3.2 | $ | 3.2 | $ | 3.1 | $ | 3.1 | ||||||||
Other short-term investments(a) |
$ | 0.2 | $ | 0.2 | $ | 0.1 | $ | 0.1 | ||||||||
Commercial paper (b) |
$ | 188.0 | $ | 188.0 | $ | 124.5 | $ | 124.5 | ||||||||
Long-term debt(c) |
$ | 599.3 | $ | 688.7 | $ | 524.1 | $ | 630.2 | ||||||||
(a) | Balance is located in cash and cash equivalents in the accompanying balance sheets. These amounts may be offset by outstanding checks. |
(b) | Balance is located in notes payable in the accompanying balance sheets. |
(c) | Excludes current maturities and unamortized discounts. |
Our money market funds are Level 1 valuations and their carrying amount approximates fair value. Other short-term investments are primarily overnight investment accounts; therefore, their carrying amount approximates fair value based on Level 2 inputs. The maturity of our commercial paper outstanding at both December 31, 2013 and September 30, 2013 is under 30 days. Due to the short term nature of these notes, the carrying cost of our commercial paper approximates fair value using Level 2 inputs. Washington Gas long-term debt is not actively traded. The fair value of long-term debt was estimated based on the quoted market prices of the U.S. Treasury issues having a similar term to maturity, adjusted for Washington Gas credit quality. Our long-term debt fair value measurement is classified as Level 3.
Non Recurring Basis
During the three months ended December 31, 2013, Washington Gas impaired its previous operation facility by reducing the carrying amount of $22.3 million down to its fair value of $21.5 million, resulting in an impairment charge of $0.8 million based on the progress made towards selling the facility. During the fiscal year ended September 30, 2013, Washington Gas impaired this facility by reducing the carrying amount of $24.9 million down to its fair value of $22.3 million, resulting in an impairment charge of $2.6 million. The fair value of this facility is a Level 3 measurement. At September 30, 2013, the facility was valued using the discounted cash value model that incorporated the anticipated sale proceeds indicated through a comparable analysis, incorporating expected market trends, prepared by an independent consultant and the estimated costs to carry the asset until a sale is completed. The December 31, 2013 valuation is based on the progress in the efforts to sell the property.
31
WGL Holdings, Inc.
Washington Gas Light Company
Part IFinancial Information
Item 1Financial Statements (continued)
Notes to Consolidated Financial Statements (Unaudited)
NOTE 10. OPERATING SEGMENT REPORTING
We have four reportable operating segments: regulated utility, retail energy-marketing, commercial energy systems and midstream energy services. The division of these segments into separate revenue generating components is based upon regulation, products and services. Our chief operating decision maker is our Chief Executive Officer. Our four segments are summarized below.
| Regulated Utility The regulated utility segment is our core business. It consists of Washington Gas and Hampshire. Washington Gas provides regulated gas distribution services (including the sale and delivery of natural gas) to customers and natural gas transportation services to an unaffiliated natural gas distribution company in West Virginia under a Federal Energy Regulatory Commission (FERC) approved interstate transportation service operating agreement. Hampshire provides regulated interstate natural gas storage services to Washington Gas under a FERC approved interstate storage service tariff. |
| Retail Energy-Marketing The retail energy-marketing segment consists of WGEServices, which sells natural gas and electricity directly to retail customers in competition with regulated utilities and unregulated gas and electricity marketers. |
| Commercial Energy Systems The commercial energy systems segment consists of WGESystems and WGSW. WGES provides design-build energy efficient and sustainable solutions including commercial solar, energy efficiency and combined heat and power projects to government and commercial clients. WGSW is a holding company formed to invest in alternative energy assets. |
| Midstream Energy Services The midstream energy services segment consists of WGL Midstream, which engages in acquiring, managing and optimizing natural gas storage and transportation assets. |
Activities and transactions that are not significant enough on a stand-alone basis to warrant treatment as an operating segment, and that do not fit into one of our four operating segments, are aggregated as Other Activities and included as part of non-utility operations in the Operating Segment Financial Information presented below. Administrative and business development activity costs associated with WGL and Washington Gas Resources are included in this segment.
While net income or loss applicable to common stock is the primary criterion for measuring a segments performance, we also evaluate our operating segments based on other relevant factors, such as penetration into their respective markets and return on equity.
32
WGL Holdings, Inc.
Washington Gas Light Company
Part IFinancial Information
Item 1Financial Statements (continued)
Notes to Consolidated Financial Statements (Unaudited)
The following tables present operating segment information for the three months ended December 31, 2013 and 2012.
Operating Segment Financial Information
Non-Utility Operations | ||||||||||||||||||||||||||||
(In thousands) | Regulated Utility |
Retail Energy-Marketing |
Commercial Energy Systems |
Midstream Energy Services |
Other Activities | Eliminations (b) | Consolidated | |||||||||||||||||||||
Three Months Ended December 31, 2013 |
||||||||||||||||||||||||||||
Operating revenues (a) |
$ | 390,415 | $ | 322,938 | $ | 4,717 | $ | (33,173) | $ | | $ | (4,600) | $ | 680,297 | ||||||||||||||
Operating expenses: |
||||||||||||||||||||||||||||
Cost of energy-related sales |
190,695 | 303,268 | 3,145 | | | (4,876) | 492,232 | |||||||||||||||||||||
Operation |
57,430 | 11,251 | 1,474 | 1,124 | 3,004 | 17 | 74,300 | |||||||||||||||||||||
Maintenance |
13,842 | | | | | | 13,842 | |||||||||||||||||||||
Depreciation and amortization |
25,369 | 174 | 1,093 | 31 | | (77) | 26,590 | |||||||||||||||||||||
General taxes and other assessments: |
||||||||||||||||||||||||||||
Revenue taxes |
24,671 | 1,947 | 1 | | | | 26,619 | |||||||||||||||||||||
Other |
12,775 | 1,068 | 52 | 87 | 21 | (1) | 14,002 | |||||||||||||||||||||
Total operating expenses |
$ | 324,782 | $ | 317,708 | $ | 5,765 | $ | 1,242 | $ | 3,025 | $ | (4,937) | $ | 647,585 | ||||||||||||||
Operating income (loss) |
65,633 | 5,230 | (1,048) | (34,415) | (3,025) | 337 | 32,712 | |||||||||||||||||||||
Equity in earnings of unconsolidated affiliates |
| | 284 | 206 | | | 490 | |||||||||||||||||||||
Other income (expense)-net |
(180) | 61 | 65 | (83) | 356 | | 219 | |||||||||||||||||||||
Interest expense |
8,879 | | | | 113 | | 8,992 | |||||||||||||||||||||
Dividends on Washington Gas preferred stock |
330 | | | | | | 330 | |||||||||||||||||||||
Income tax expense (benefit) |
17,523 | 1,976 | (562) | (12,504) | (1,099) | 136 | 5,470 | |||||||||||||||||||||
Net income (loss) applicable to common stock |
$ | 38,721 | $ | 3,315 | $ | (137) | $ | (21,788) | $ | (1,683) | $ | 201 | $ | 18,629 | ||||||||||||||
Total assets at December 31, 2013 |
$ | 3,828,709 | $ | 418,633 | $ | 380,241 | $ | 171,420 | $ | 299,769 | $ | (467,246) | $ | 4,631,526 | ||||||||||||||
Capital expenditures |
$ | 55,092 | $ | 75 | $ | 3,138 | $ | | $ | | $ | | $ | 58,305 | ||||||||||||||
Equity method investments at December 31, 2013 |
$ | | $ | | $ | 66,526 | $ | 10,813 | $ | 413 | $ | | $ | 77,752 | ||||||||||||||
Three Months Ended December 31, 2012 |
||||||||||||||||||||||||||||
Operating revenues (a) |
$ | 355,817 | $ | 324,059 | $ | 11,985 | $ | 2,854 | $ | | $ | (7,979) | $ | 686,736 | ||||||||||||||
Operating expenses: |
||||||||||||||||||||||||||||
Cost of energy-related sales |
150,448 | 290,133 | 9,111 | | | (7,573) | 442,119 | |||||||||||||||||||||
Operation |
58,208 | 11,359 | 1,232 | 844 | 791 | (254) | 72,180 | |||||||||||||||||||||
Maintenance |
11,450 | | | | | | 11,450 | |||||||||||||||||||||
Depreciation and amortization |
26,792 | 175 | 459 | 31 | | (153) | 27,304 | |||||||||||||||||||||
General taxes and other assessments: |
||||||||||||||||||||||||||||
Revenue taxes |
24,221 | 1,431 | 1 | | | | 25,653 | |||||||||||||||||||||
Other |
12,287 | 871 | 79 | 166 | 10 | 1 | 13,414 | |||||||||||||||||||||
Total operating expenses |
$ | 283,406 | $ | 303,969 | $ | 10,882 | $ | 1,041 | $ | 801 | $ | (7,979) | $ | 592,120 | ||||||||||||||
Operating income (loss) |
72,411 | 20,090 | 1,103 | 1,813 | (801) | | 94,616 | |||||||||||||||||||||
Equity in earnings of unconsolidated affiliates |
| | 245 | | | | 245 | |||||||||||||||||||||
Other income (expenses)-net |
133 | 50 | 80 | | 218 | (52) | 429 | |||||||||||||||||||||
Interest expense |
9,095 | 3 | 43 | | 104 | (52) | 9,193 | |||||||||||||||||||||
Dividends on Washington Gas preferred stock |
330 | | | | | | 330 | |||||||||||||||||||||
Income tax expense |
24,453 | 7,116 | 347 | 537 | 926 | | 33,379 | |||||||||||||||||||||
Net income (loss) applicable to common stock |
$ | 38,666 | $ | 13,021 | $ | 1,038 | $ | 1,276 | $ | (1,613) | $ | | $ | 52,388 | ||||||||||||||
Total assets at December 31, 2012 |
$ | 3,673,308 | $ | 400,951 | $ | 168,761 | $ | 201,111 | $ | 226,221 | $ | (329,415) | $ | 4,340,937 | ||||||||||||||
Capital expenditures |
$ | 60,615 | $ | 201 | $ | 15,101 | $ | | $ | | $ | | $ | 75,917 | ||||||||||||||
Equity method investments at December 31, 2012 |
$ | | $ | | $ | 29,005 | $ | | $ | 285 | $ | | $ | 29,290 | ||||||||||||||
(a) Operating revenues are reported gross of revenue taxes. Revenue taxes of both the regulated utility and the retail energy-marketing segments include gross receipt taxes. Revenue taxes of the regulated utility segment also include PSC fees, franchise fees and energy taxes. Operating revenue amounts in the Eliminations column represent total intersegment revenues associated with sales from the regulated utility segment to the retail energy-marketing segment. Midstream Energy Services cost of energy related sales is netted with its gross revenues.
(b) Intersegment eliminations net income represents a timing difference between Commercial Energy Systems recognition of revenue for the sale of Solar Renewable Energy Credits (SRECs) to Retail Energy-Marketing and Retail Energy-Marketings recognition of the associated expense. Retail Energy-Marketing has recorded a portion of the SRECs purchased as inventory to be used in future periods and will expense them at that time.
NOTE 11. OTHER INVESTMENTS
Variable Interest Entities
WGL assesses its contractual arrangements to determine control, and, by extension, correct classification of its investments. In most cases, control can be determined based on majority ownership or voting interests. However, there are certain entities known as variable interest entities (VIEs) for which control is difficult to discern based on ownership or
33
WGL Holdings, Inc.
Washington Gas Light Company
Part IFinancial Information
Item 1Financial Statements (continued)
Notes to Consolidated Financial Statements (Unaudited)
voting interests alone. WGL and its subsidiaries first determine if an entity is a VIE. A VIE is an entity that does not have sufficient equity at risk to finance its activities without additional subordinated financial support from other parties, or whose equity investors, as a group, lack the characteristics of a controlling financial interest.
At December 31, 2013, WGSW is party to three agreements to fund residential and commercial retail solar energy installations with three separate, privately held companies. WGSW has a master purchase agreement and master lease agreement with EchoFirst Finance Company LLC (EchoFirst) and Skyline Innovations, Inc (Skyline) for sale/leaseback arrangements for residential and commercial solar systems. WGSW is also a limited partner in ASD Solar LP, a partnership formed to own and operate a portfolio of residential solar projects, primarily rooftop photovoltaic power generation systems. As a limited partner, WGSW provides funding to the partnership but is excluded from involvement in the partnerships operations.
At December 31, 2013, Washington Gas Resources owned all of the shares of common stock of Crab Run Gas Company. Crab Run Gas Company is an exploration and production company who is the limited partner in the Western/Crab Run Limited Partnership (Crab Run). The partnership was formed to manage oil and gas properties and perform oil and gas leasing, marketing and production activities.
We have determined that we have a variable interest in four investments that qualify as VIEs. The four investments are:
| EchoFirst, |
| Skyline, |
| ASD Solar LP, and |
| Crab Run. |
An enterprise that has a controlling financial interest in a VIE is known as the VIEs primary beneficiary and is required to consolidate the VIE. A primary beneficiary has the obligation to absorb expected losses or the right to receive expected gains that could potentially be significant to the VIE and has decision-making rights associated with the activities that are most significant to the VIEs economic performance, including the power to design the VIE.
In determining whether the Company is the primary beneficiary of a VIE, we assess which variable interest holder has control over the VIEs significant economic activities, such as the design of the companies, vendor selection, operation activities, construction, customer selection, and re-marketing activities after the termination of customer leases. For each of the VIEs identified above, it was determined that another entity controlled the economic activities and had the obligation to absorb expected losses or the right to receive expected gains that could be significant to the VIE. Our maximum financial exposure from agreements is limited to its lease payment receivables and investment contributions made to these companies. All additional future committed contributions are contingent on the projects meeting required criteria. Our exposure is offset by the owned physical assets received as part of the transaction and the quick economic return for the investment through the investment tax credit/treasury grant proceeds and accelerated depreciation. At December 31, 2013, we have determined that WGL and its subsidiaries are not the primary beneficiary for any of the above VIEs, therefore we have not consolidated any of the VIE entities.
Skyline/Echofirst
Our agreements with Skyline and EchoFirst are accounted for as direct financing leases. WGSW records lease receipts and associated interest in the Other Income line in the accompanying Consolidated Statement of Income. WGSW held a $25.5 million and $29.2 million combined investment in direct financing leases at December 31, 2013 and September 30, 2013, respectively, of which $2.2 million and $5.8 million are current receivables recorded in Other Current Assets in the accompanying Consolidated Balance Sheets at December 31, 2013 and September 30, 2013, respectively.
34
WGL Holdings, Inc.
Washington Gas Light Company
Part IFinancial Information
Item 1Financial Statements (continued)
Notes to Consolidated Financial Statements (Unaudited)
Minimum future lease payments receivable under direct financing leases over the next five years and thereafter are as follows:
Minimum Payments Receivable for Direct Financing Leases | ||||
(In millions) | ||||
2014 |
$ | 2.2 | ||
2015 |
1.2 | |||
2016 |
1.2 | |||
2017 |
1.2 | |||
2018 |
1.2 | |||
Thereafter |
12.8 | |||
Total |
$ | 19.8 | ||
Minimum payments receivable include $45,000 of unearned income recognized as interest, exclude $4.4 million of residual values and $1.3 million in taxes. The initial direct costs (incurred in FY 2012) associated with these investments was $0.7 million.
ASD Solar, LP
Our investment in ASD Solar, LP is accounted for under the equity method of accounting referred to as the hypothetical liquidation at book value method (HLBV) for allocating profits and losses; any profits and losses are included in Earnings from Equity Method Investments in the accompanying Consolidated Statement of Income and are added to or subtracted from the carrying amount of WGSWs investment balance.
ASD Solar, LP is consolidated by the general partner, Solar Direct LLC. Solar Direct LLC is a wholly owned subsidiary of American Solar Direct Inc. (ASDI). The carrying amount of WGSWs investment in ASD Solar, LP exceeds the amount of the underlying equity in net assets by $35.6 million due to WGSW recording additions to its investment in ASD Solar, LPs net assets at fair value of contributions in accordance with GAAP. This basis difference is being amortized over the life of the assets.
Crab Run
Crab Run is accounted for under the equity method of accounting; any profits and losses are included in Earnings from Equity Method Investments in the accompanying Consolidated Statement of Income and are added to or subtracted from the carrying amount of WGLs investment balance.
Non-VIE Investments
ASDHI
Washington Gas Resources held a $5.6 million investment in American Solar Direct Holdings Inc. (ASDHI), at both December 31, 2013 and September 30, 2013. This investment is recorded at cost. The profits and losses are included in Other Income in the accompanying Consolidated Statement of Income. No identified events or changes in circumstances that may have a significant effect on the carrying value of this investment have occurred. At both December 31, 2013 and September 30, 2013, Washington Gas Resources also held $1.1 million in warrants of ASDHI accounted for as derivatives and recorded at fair value.
Constitution
In May of 2013, WGL Midstream invested in Constitution Pipeline Company, LLC (Constitution). WGL Midstream will invest an estimated $68.0 million in the project for a 10% share in the pipeline venture. WGL Midstream joins Williams Partners L.P. (41% share), Cabot Oil and Gas Corporation (25% share) and Piedmont Natural Gas (24% share) in the project. This natural gas pipeline venture will transport natural gas from the Marcellus region in northern Pennsylvania to major northeastern markets. Constitution is accounted for under the equity method of accounting; any profits and losses are included in Earnings from Equity Method Investments in the accompanying Consolidated Statement of Income and are added to or subtracted from the carrying amount of WGLs investment balance. The equity method is considered appropriate because Constitution is an LLC with specific ownership accounts and ownership between five and fifty percent resulting in WGL Midstream maintaining a more than minor influence over the partnership operating and financing policies.
35
WGL Holdings, Inc.
Washington Gas Light Company
Part IFinancial Information
Item 1Financial Statements (continued)
Notes to Consolidated Financial Statements (Unaudited)
The balance sheet location of the investments discussed in this footnote at December 31, 2013 and September 30, 2013 are as follows:
WGL Holdings, Inc. Balance Sheet Location of Other Investments |
| |||||||||||
As of December 31, 2013 (in millions) |
VIEs | Non-VIEs | Total | |||||||||
Assets |
||||||||||||
Investments in unconsolidated affiliates |
$ | 67.0 | $ | 16.4 | $ | 83.4 | ||||||
Investment in direct financing leases receivable |
23.0 | | 23.0 | |||||||||
Derivatives |
| 1.1 | 1.1 | |||||||||
Other |
2.6 | | 2.6 | |||||||||
Total assets |
$ | 92.6 | $ | 17.5 | $ | 110.1 | ||||||
Liabilities |
||||||||||||
Other |
$ | 8.3 | $ | | $ | 8.3 | ||||||
Total liabilities |
$ | 8.3 | $ | | $ | 8.3 | ||||||
WGL Holdings, Inc. Balance Sheet Location of Other Investments |
| |||||||||||
As of September 30, 2013 (in millions) |
VIEs | Non-VIEs | Total | |||||||||
Assets |
||||||||||||
Investments in unconsolidated affiliates |
$ | 55.4 | $ | 12.1 | $ | 67.5 | ||||||
Investment in direct financing leases receivable |
23.4 | | 23.4 | |||||||||
Derivatives |
| 1.1 | 1.1 | |||||||||
Other |
5.8 | | 5.8 | |||||||||
Total assets |
$ | 84.6 | $ | 13.2 | $ | 97.8 | ||||||
Liabilities |
||||||||||||
Other |
$ | 8.5 | $ | | $ | 8.5 | ||||||
Total liabilities |
$ | 8.5 | $ | | $ | 8.5 | ||||||
The income statement location of the investments discussed in this footnote for the three months ended December 31, 2013 and 2012 are as follows:
WGL Holdings, Inc. Income Statement Location of Other Investments |
| |||||||||||
Three Months Ended December 31, 2013 (in millions) |
VIEs | Non-VIEs | Total | |||||||||
Equity in earnings of unconsolidated affiliates |
$ | 0.3 | $ | 0.2 | $ | 0.5 | ||||||
Depreciation and amortization |
0.1 | | 0.1 | |||||||||
Other income |
0.5 | 0.2 | 0.7 | |||||||||
Net income |
$ | 0.7 | $ | 0.4 | $ | 1.1 | ||||||
WGL Holdings, Inc. Income Statement Location of Other Investments |
| |||||||||||
Three Months Ended December 31, 2012 (in millions) |
VIEs | Non-VIEs | Total | |||||||||
Equity in earnings of unconsolidated affiliates |
$ | 0.2 | $ | | $ | 0.2 | ||||||
Other income |
0.2 | 0.1 | 0.3 | |||||||||
Net income |
$ | 0.4 | $ | 0.1 | $ | 0.5 | ||||||
36
WGL Holdings, Inc.
Washington Gas Light Company
Part IFinancial Information
Item 1Financial Statements (continued)
Notes to Consolidated Financial Statements (Unaudited)
NOTE 12. RELATED PARTY TRANSACTIONS
WGL and its subsidiaries engage in transactions during the ordinary course of business. Inter-company transactions and balances have been eliminated from the consolidated financial statements of WGL, except as described below. Washington Gas provides accounting, treasury, legal and other administrative and general support to affiliates, and files consolidated tax returns with WGL that include affiliated taxable transactions. Washington Gas bills its affiliates in accordance with regulatory requirements for the actual cost of providing these services, which approximates their market value. To the extent such billings are not yet paid, they are reflected in Receivables from associated companies on Washington Gas balance sheets. Washington Gas assigns or allocates these costs directly to its affiliates and, therefore, does not recognize revenues or expenses associated with providing these services.
In connection with billing for unregulated third party marketers and with other miscellaneous billing processes, Washington Gas collects cash on behalf of affiliates and transfers the cash in a reasonable time period. Cash collected by Washington Gas on behalf of its affiliates but not yet transferred is recorded in Payables to associated companies on Washington Gas balance sheets. The following table presents the receivables and payables from associated companies on Washington Gas balance sheets as of December 31, 2013 and September 30, 2013.
Washington Gas Receivables / Payables from Associated Companies | ||||||||
(In millions) | December 31, 2013 | September 30, 2013 | ||||||
Receivables from Associated Companies |
$ | 4.8 | $ | 7.2 | ||||
Payables to Associated Companies |
$ | 36.0 | $ | 20.6 | ||||
Washington Gas provides gas balancing services related to storage, injections, withdrawals and deliveries to all energy marketers participating in the sale of natural gas on an unregulated basis through the customer choice programs that operate in its service territory. These balancing services include the sale of natural gas supply commodities related to various peaking arrangements contractually supplied to Washington Gas and then partially allocated and assigned by Washington Gas to the energy marketers, including WGEServices. Washington Gas records revenues for these balancing services pursuant to tariffs approved by the appropriate regulatory bodies. These related party amounts have been eliminated in the consolidated financial statements of WGL. The following table shows the amounts Washington Gas charged WGEServices for balancing services.
Washington Gas-Gas Balancing Service Charges |
| |||||||
Three Months Ended December 31, |
||||||||
(In millions) | 2013 | 2012 | ||||||
Gas balancing service charge |
$ | 3.8 | $ | 7.6 | ||||
As a result of these balancing services, an imbalance is created for volumes of natural gas received by Washington Gas that are not equal to the volumes of natural gas delivered to customers of the energy marketers. WGEServices recognized an accounts receivable from Washington Gas in the amount of $0.3 million and $1.0 million at December 31, 2013 and September 30, 2013, respectively, related to an imbalance in gas volumes. Due to regulatory treatment, these payables and receivables are not eliminated in the consolidated financial statements of WGL. Refer to Note 1Accounting Policies of the Notes to Consolidated Financial Statements of the combined Annual Report on Form 10-K for the fiscal year ended September 30, 2013 for further discussion of these imbalance transactions.
Washington Gas participates in a Purchase of Receivables (POR) program as approved by the PSC of MD, whereby it purchases receivables from participating energy marketers at approved discount rates. In addition, WGEServices participates in POR programs with certain Maryland and Pennsylvania utilities, whereby it sells its receivables to various utilities, including Washington Gas, at approved discount rates. The receivables purchased by Washington Gas are included in Accounts receivable in the accompanying balance sheet. Any activity between Washington Gas and WGEServices related to the POR program has been eliminated in the accompanying financial statements for WGL. During the three months ended December 31, 2013 and during the fiscal year ended September 30, 2013, Washington Gas purchased $19.9 million and $106.6 million, respectively, of receivables from WGEServices.
37
WGL Holdings, Inc.
Washington Gas Light Company
Part IFinancial Information
Item 1Financial Statements (continued)
Notes to Consolidated Financial Statements (Unaudited)
NOTE 13. COMMITMENTS AND CONTINGENCIES
RATES AND REGULATORY MATTERS
Washington Gas makes its requests to modify existing rates based on its determination of the level of net investment in plant and equipment, operating expenses, and a level of return on invested capital that is just and reasonable. The following is an update of significant current regulatory matters in each of Washington Gas jurisdictions. For a more detailed discussion of the matters below, refer to our combined Annual Report on Form 10-K for WGL and Washington Gas for the fiscal year ended September 30, 2013.
District of Columbia Jurisdiction
On August 15, 2013, Washington Gas filed a request for approval with the Public Service Commission of the District of Columbia (PSC of DC) of a revised accelerated pipe replacement plan (Plan) and surcharge mechanism to recover the associated costs for the first five years of the Plan. Washington Gas proposes to replace bare and/or unprotected steel services, bare and targeted unprotected steel main, and cast iron main in its distribution system in the District of Columbia at an estimated five-year cost of $110.0 million. Comments and replies were filed by interested parties. A PSC of DC order in this matter is pending.
Weather Normalization Adjustment (WNA). On November 8, 2013, Washington Gas filed an application for approval of a WNA, which is a rate design mechanism that eliminates the variability of weather from the calculation of actual billed revenues and offers customers more stability in their bills during colder-than-normal winter heating seasons. Washington Gas application in this matter is pending.
Maryland Jurisdiction
On November 22, 2013, the PSC of MD issued an order granting an overall increase of $8.9 million, based on the capital structure recommended by the Staff of the PSC. The order approved a return on equity of 9.50% resulting in an overall rate of return of 7.70%. The order also clarified that Washington Gas was authorized to establish a regulatory asset and amortize the costs related to the change in tax treatment of Med D. Finally, the PSC of MD denied Washington Gas appeal on recovery of the costs to initiate the outsourcing agreement with Accenture, LLP. As a result of this order, Washington Gas has established a Med D regulatory asset in the first quarter of fiscal year 2014 and has begun amortizing the balance. On December 20, 2013, Washington Gas filed a request for rehearing and an appeal with the Baltimore City Circuit Court appealing the PSC of MDs rulings on capital structure, return on equity, and recovery of the costs to initiate the outsourcing agreement. The case is pending further commission action.
Virginia Jurisdiction
Affiliate Transactions. On October 2, 2012, Washington Gas filed an application with the Commonwealth of Virginia State Corporation Commission (SCC of VA) for approval of revised service agreements between Washington Gas and two affiliatesWGEServices and WGESystems. The revised service agreements incorporate recommendations from the Staff of the SCC of VA that Washington Gas agreed to include as part of the stipulation approved in Washington Gas Virginia base rate case, revisions to the descriptions of services provided to the affiliates, and revisions to permit the two affiliates to participate in some health and welfare plans sponsored by Washington Gas. On December 21, 2012, the SCC of VA approved the revised services agreements with only minor modifications. On January 18, 2013, Washington Gas filed a separate application requesting approval of revised service agreements between Washington Gas and each of the remaining five affiliates receiving services.
On April 2, 2013, Washington Gas filed a second amendment to provide additional services to two of its affiliates, and to further revise the proposed service agreements that were included in the January 18, 2013 application. On May 24, 2013, the SCC of VA approved revised service agreements for WGL Holdings Inc., Washington Gas Resources Corp., Hampshire Gas Company, Crab Run Gas Company and WGL Midstream, Inc. On October 10, 2013, the SCC of VA approved a service agreement for Washington Gas to provide services to WGL Midstream CP, LLC, a subsidiary of WGL Midstream, Inc.
On June 16, 2011, Washington Gas submitted an application to the SCC of VA requesting approval of three affiliate transactions with WGL Midstream: (i) the transfer to WGL Midstream of the remainder of the term of two agreements for natural gas storage service at the Washington Gas Storage (WSS) and Eminence Storage Service (ESS) storage fields; (ii) the sale to WGL Midstream of any storage gas balances associated with the WSS and ESS agreements; and (iii) the assignment to WGL Midstream of Washington Gas rights to buy base gas in the WSS storage field. The SCC of VA did not approve the transfer of the agreements on the grounds that ratepayers funded a portion of the costs associated with the assets.
38
WGL Holdings, Inc.
Washington Gas Light Company
Part IFinancial Information
Item 1Financial Statements (continued)
Notes to Consolidated Financial Statements (Unaudited)
On June 5, 2013, Washington Gas filed a petition for a declaratory judgment that because the proposed transfers are governed by the FERC, the SCC of VA does not have jurisdiction over the transaction.
On August 30, 2013, Staff filed its response to Washington Gas petition. Staff argued that the transaction at debate in this proceeding is appropriately regulated by the SCC of VA. On September 27, 2013, Washington Gas filed its response to Staffs argument. The Senior Hearing Examiners findings, issued in his October 31, 2013 report, were that the proposed transfer is not preempted by FERC and is subject to commission jurisdiction under the Affiliates Act.
The SCC of VA appointed a hearing examiner to conduct all further proceedings. On October 31, 2013, the Senior Hearing Examiner issued a report finding that the SCC of VA has jurisdiction over the proposed transfers. Washington Gas filed comments on the report on December 5, 2013. The case is pending commission review.
CONSTRUCTION PROJECT FINANCING
To fund certain of its construction projects, Washington Gas enters into financing arrangements with third party lenders. As part of these financing arrangements, Washington Gas customers agree to make principal and interest payments over time, typically beginning after the projects are completed. Washington Gas assigns these customer payment streams to the lender. As the lender funds the construction project, Washington Gas establishes a receivable representing its customers obligations to remit principal and interest and a long-term payable to the lender. When these projects are formally accepted by the customer as completed, Washington Gas transfers the ownership of the receivable to the lender and removes both the receivable and the long-term financing from its financial statements. As of December 31, 2013 and September 30, 2013, work on these construction projects that was not completed or accepted by customers was valued at $8.3 million and $6.7 million, respectively. These amounts are recorded on the balance sheet as a receivable in Deferred Charges and Other AssetsOther with the corresponding long-term obligation to the lender recorded under Long-term debt. At any time before these contracts are accepted by the customer, should there be a contract default, such as, among other things, a delay in completing the project, the lender may call on Washington Gas to fund the unpaid principal in exchange for which Washington Gas would receive the right to the stream of payments from the customer. Construction projects are financed primarily for government agencies, which Washington Gas considers to have minimal credit risk. Based on this assessment and previous collection experience, Washington Gas did not record any corresponding reserves for bad debt related to these receivables at December 31, 2013 or September 30, 2013.
FINANCIAL GUARANTEES
WGL has guaranteed payments primarily for certain purchases of natural gas and electricity on behalf of WGEServices and for certain purchase commitments on behalf of WGL Midstream. At December 31, 2013, these guarantees totaled $313.5 million and $185.7 million for WGEServices and WGL Midstream, respectively. The amount of such guarantees is periodically adjusted to reflect changes in the level of financial exposure related to these purchase commitments. We also receive financial guarantees or other collateral from counterparties when required by our credit policy (refer to the section entitled Credit Risk for a further discussion of our credit policy). WGL also issued guarantees totaling $7.8 million at December 31, 2013 on behalf of certain of our non-utility subsidiaries and unconsolidated investments associated with their banking transactions. Of the total guarantees of $507.0 million, $4.0 million expires in January 2014, $6.0 million expires in October 2014 and $0.5 million expires in September 2033. The remaining guarantees do not have specific maturity dates. For all of its financial guarantees, WGL may cancel any or all future obligations upon written notice to the counterparty, but WGL would continue to be responsible for the obligations created under the guarantees prior to the effective date of the cancellation.
39
WGL Holdings, Inc.
Washington Gas Light Company
Part IFinancial Information
Item 1Financial Statements (continued)
Notes to Consolidated Financial Statements (Unaudited)
NOTE 14. PENSION AND OTHER POST-RETIREMENT BENEFIT PLANS
The following table shows the components of net periodic benefit costs recognized in our financial statements during the three months ended December 31, 2013 and 2012:
Components of Net Periodic Benefit Costs (Income) | ||||||||||||||||
Three Months Ended December 31, | ||||||||||||||||
2013 | 2012 | |||||||||||||||
(In millions) | Pension Benefits |
Health and Life Benefits |
Pension Benefits |
Health and Life Benefits |
||||||||||||
Components of net periodic benefit costs (income) |
||||||||||||||||
Service cost |
$ | 3.5 | $ | 2.1 | $ | 4.2 | $ | 2.4 | ||||||||
Interest cost |
10.1 | 5.4 | 9.1 | 4.7 | ||||||||||||
Expected return on plan assets |
(10.3 | ) | (4.7 | ) | (10.5 | ) | (4.6 | ) | ||||||||
Amortization of prior service cost (credit) |
0.1 | (1.0 | ) | 0.3 | (1.0 | ) | ||||||||||
Amortization of actuarial loss |
4.2 | 0.7 | 7.2 | 2.3 | ||||||||||||
Amortization of transition obligation |
| | | 0.3 | ||||||||||||
Net periodic benefit cost |
7.6 | 2.5 | 10.3 | 4.1 | ||||||||||||
Amount allocated to construction projects |
(1.0 | ) | (0.4 | ) | (1.4 | ) | (0.7 | ) | ||||||||
Amount amortized/deferred as regulatory asset |
1.8 | 0.1 | (2.4 | ) | 0.8 | |||||||||||
Amount charged to expense |
$ | 8.4 | $ | 2.2 | $ | 6.5 | $ | 4.2 | ||||||||
Amounts included in the line item Amount amortized/deferred as regulatory asset, as shown in the table above, represent the amortization of a regulatory asset as of December 31, 2013 and the difference between the cost of the applicable Pension Benefits or the Health and Life Benefits and the amount that Washington Gas is permitted to recover in rates that it charges to customers in the District of Columbia as of December 31, 2012.
NOTE 15. CHANGES IN ACCUMULATED OTHER COMPREHENSIVE INCOME
All components of other comprehensive income are related to the amortization of pension and other post-retirement benefit costs. The following table shows the changes in accumulated other comprehensive income for both WGL and Washington Gas by component during the three months ended December 31, 2013 and 2012:
Changes in Accumulated Other Comprehensive Income by Component | ||||||||
Three Months Ended December 31, | ||||||||
2013 | 2012 | |||||||
(In thousands) | ||||||||
Beginning Balance |
$ | (11,048 | ) | $ | (12,201 | ) | ||
Amortization of prior service cost (a) |
(35 | ) | (12 | ) | ||||
Amortization of actuarial loss (a) |
364 | 462 | ||||||
Amortization of transition obligation (a) |
| 9 | ||||||
Current-period other comprehensive income |
329 | 459 | ||||||
Income tax expense related to other comprehensive income |
130 | 182 | ||||||
Ending Balance |
$ | (10,849 | ) | $ | (11,924 | ) | ||
(a) These accumulated other comprehensive income components are included in the computation of net periodic benefit cost. Refer to Note 14-Pension and other post-retirement benefit plans for additional details.
40
WGL Holdings, Inc.
Washington Gas Light Company
Part IFinancial Information
Item 1Financial Statements (concluded)
Notes to Consolidated Financial Statements (Unaudited)
NOTE 16. SUBSEQUENT EVENTS
Ratings Upgraded
On January 30, 2014, Moodys Investors Service (Moodys) upgraded the senior unsecured rating of Washington Gas to A1 from A2 and confirmed WGLs P-2 commercial paper rating. Additionally, Moodys upgraded Washington Gas preferred stock rating to A3 from Baa1. Per Moodys, the outlook for Washington Gas is stable.
41
WGL Holdings, Inc.
Washington Gas Light Company
Part IFinancial Information
Item 2Managements Discussion and Analysis of
Financial Condition and Results of Operations
ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
INTRODUCTION
This Managements Discussion and Analysis of Financial Condition and Results of Operations (Managements Discussion) analyzes the financial condition, results of operations and cash flows of WGL and its subsidiaries. It also includes managements analysis of past financial results and potential factors that may affect future results, potential future risks and approaches that may be used to manage them. Except where the content clearly indicates otherwise, WGL, we, us or our refers to the holding company or the consolidated entity of WGL Holdings, Inc. and all of its subsidiaries.
Managements Discussion is divided into the following two major sections:
| WGLThis section describes the financial condition and results of operations of WGL Holdings, Inc. and its subsidiaries on a consolidated basis. It includes discussions of our regulated operations, including Washington Gas and Hampshire Gas Company (Hampshire), and our non-utility operations. |
| Washington GasThis section describes the financial condition and results of operations of Washington Gas, a subsidiary of WGL, which comprises the majority of the regulated utility segment. |
Both sections of Managements DiscussionWGL and Washington Gasare designed to provide an understanding of our operations and financial performance and should be read in conjunction with the respective companys financial statements and the combined Notes to Consolidated Financial Statements in this quarterly report as well as our combined Annual Report on Form 10-K for WGL and Washington Gas for the fiscal year ended September 30, 2013 (2013 Annual Report).
Unless otherwise noted, earnings per share amounts are presented on a diluted basis, and are based on weighted average common and common equivalent shares outstanding. Our operations are seasonal and, accordingly, our operating results for the interim periods presented are not indicative of the results to be expected for the full fiscal year.
EXECUTIVE OVERVIEW
Introduction
WGL, through its subsidiaries, sells and delivers natural gas and provides a variety of energy-related products and services to customers primarily in the District of Columbia and the surrounding metropolitan areas in Maryland and Virginia. In addition to our primary markets, WGLs non-utility subsidiaries own energy assets in 29 states.
WGL has four operating segments:
| regulated utility; |
| retail energy-marketing; |
| commercial energy systems and |
| midstream energy services. |
Our core subsidiary, Washington Gas, engages in the delivery and sale of natural gas that is regulated by regulatory commissions in the District of Columbia, Maryland and Virginia. Through the wholly owned unregulated subsidiaries of Washington Gas Resources, we offer energy-related products and services. We offer competitively priced natural gas, electricity and energy from renewable sources to customers through WGEServices, our non-utility retail energy-marketing subsidiary. We offer efficient and sustainable commercial energy solutions focused on upgrading energy related systems of large government and commercial facilities as well as own and operate distributed generation assets such as Solar Photovoltaic (Solar PV) systems through WGESystems and WGSW. WGL Midstream engages in acquiring, owning and optimizing natural gas storage and transportation assets.
Regulated Utility. The regulated utility segment consists of Washington Gas and Hampshire and represents approximately 84% of WGLs consolidated total assets. Washington Gas is a regulated public utility that sells and delivers natural gas to retail customers in accordance with tariffs approved by the regulatory commissions in the District of Columbia and adjoining areas in Maryland, Virginia and several cities and towns in the northern Shenandoah Valley of Virginia. These regulatory commissions set the rates in their respective jurisdictions that Washington Gas can charge customers for its rate-
42
WGL Holdings, Inc.
Washington Gas Light Company
Part IFinancial Information
Item 2Managements Discussion and Analysis of
Financial Condition and Results of Operations (continued)
regulated services. Washington Gas also sells natural gas to customers who have not elected to purchase natural gas from unregulated third party marketers. Washington Gas recovers the cost of the natural gas purchased to serve firm customers through gas cost recovery mechanisms as approved in jurisdictional tariffs. Any difference between gas costs incurred on behalf of firm customers and the gas costs recovered from those customers is deferred on the balance sheet as an amount to be collected from or refunded to customers in future periods. Therefore, increases or decreases in the cost of gas associated with sales made to firm customers have no direct effect on Washington Gas net revenues and net income.
Washington Gas, under its asset optimization program, makes use of storage and transportation capacity resources when those assets are not required to serve utility customers. The objective of this program is to derive a profit to be shared with its utility customers by entering into commodity-related physical and financial contracts with third parties (refer to the section entitled Market Risk for further discussion of the asset optimization program). Unless otherwise noted, therm deliveries reported for the regulated utility segment do not include those related to the asset optimization program.
Hampshire owns full and partial interests in underground natural gas storage facilities, including pipeline delivery facilities located in and around Hampshire County, West Virginia, and operates those facilities to serve Washington Gas, which purchases all of the storage services of Hampshire. Washington Gas includes the cost of these services in the bills sent to its customers. Hampshire operates under a pass-through cost of service-based tariff approved by the FERC, and adjusts its billing rates to Washington Gas on a periodic basis to account for changes in its investment in utility plant and associated expenses.
Retail Energy-Marketing. The retail energy-marketing segment consists of the operations of WGEServices. WGEServices competes with regulated utilities and other unregulated third party marketers to sell natural gas and/or electricity directly to residential, commercial and industrial customers in Delaware, the District of Columbia, Maryland, Pennsylvania and Virginia. WGEServices buys natural gas and electricity with the objective of earning a profit through competitively priced sales contracts with end-users. These commodities are delivered to retail customers through the distribution systems owned by regulated utilities. Washington Gas delivers the majority of natural gas sold by WGEServices, and unaffiliated electric utilities deliver all of the electricity sold. Additionally, WGEServices bills its customers either independently or through the billing services of the regulated utilities that deliver its commodities.
WGEServices also sells wind and other renewable energy credits and carbon offsets to retail customers. WGEServices does not own or operate any other natural gas or electric generation, production, transmission or distribution assets.
Commercial Energy Systems. The commercial energy systems segment consists of the operations of WGESystems, WGSW and the results of operations of affiliate owned commercial solar projects. WGESystems provides energy efficiency and sustainability solutions to governmental and commercial clients. These solutions include energy efficiency projects and distributed generation assets that we own and operate such as Solar PV systems, combined heat and power plants, and fuel cells. WGESystems also focuses on upgrading the mechanical, electrical, water and energy-related infrastructure of large governmental and commercial facilities by implementing both traditional as well as alternative energy technologies, primarily in the District of Columbia, Maryland and Virginia. In addition to these three regions, WGESystems is also expanding its portfolio of Solar PV power generating systems into Arizona, California, Connecticut, Delaware, Georgia, Hawaii, Massachusetts, New Jersey and New Mexico. WGESystems is also evaluating opportunities in other geographical locations within the United States.
WGSW is a holding company formed to invest in alternative energy assets. WGSW holds a limited partnership in ASD Solar, LP in addition to investments in solar assets through sale leaseback arrangements.
Midstream Energy Services. The Midstream Energy Services segment, which consists of the operations of WGL Midstream, engages in developing, acquiring, managing and optimizing natural gas storage and transportation assets. WGL Midstream enters into both physical and financial derivative transactions to mitigate risks while maximizing potential profits from the optimization of these assets under its management. The associated storage and transportation assets are not accounted for as derivative instruments. These derivatives may cause significant period-to-period volatility in earnings as recorded under GAAP; however, this volatility will not change the operating margins that WGL Midstream expects to ultimately realize from sales to customers or counterparties through the use of storage and transportation assets. WGL Midstreams customers and counterparties include producers, utilities, local distribution companies, power generators, wholesale energy suppliers, pipelines and storage facilities. WGL Midstreams risk management policy requires it to closely match its forward physical and financial positions with its asset base, thereby minimizing its price risk exposure. For a discussion of WGL Midstreams
43
WGL Holdings, Inc.
Washington Gas Light Company
Part IFinancial Information
Item 2Managements Discussion and Analysis of
Financial Condition and Results of Operations (continued)
exposure to and management of price risk, refer to the section entitled Market RiskPrice Risk Related to the Other Non-Utility Segment in Managements Discussion and Analysis.
Other Activities. Activities and transactions that are not significant enough on a stand-alone basis to warrant treatment as an operating segment, and that do not fit into one of our other operating segments, are aggregated as Other activities and are included as part of non-utility operations in the operating segment financial information. Administrative and business development activity costs associated with WGL and Washington Gas Resources are included in this segment.
PRIMARY FACTORS AFFECTING WGL AND WASHINGTON GAS
The principal business, economic and other factors that affect our operations and/or financial performance include:
| weather conditions and weather patterns; |
| regulatory environment, regulatory decisions and changes in legislation; |
| availability of natural gas supply and pipeline transportation and storage capacity; |
| diversity of natural gas supply; |
| volatility of natural gas and electricity prices; |
| non-weather related changes in natural gas consumption patterns; |
| maintaining the safety and reliability of the natural gas distribution system; |
| competitive environment; |
| environmental matters; |
| industry consolidation; |
| economic conditions and interest rates; |
| inflation; |
| use of business process outsourcing; |
| labor contracts, including labor and benefit costs and |
| changes in accounting principles. |
For further discussion of the factors listed above, refer to Managements Discussion within the 2013 Annual Report. Also, refer to the section entitled Safe Harbor for Forward-Looking Statements included in this quarterly report for a listing of forward-looking statements related to factors affecting WGL and Washington Gas.
CRITICAL ACCOUNTING POLICIES
The preparation of financial statements and related disclosures in compliance with Generally Accepted Accounting Principles requires the selection and the application of appropriate technical accounting guidance to the relevant facts and circumstances of our operations, as well as our use of estimates to compile the consolidated financial statements. The application of these accounting policies involves judgment regarding estimates and projected outcomes of future events, including the likelihood of success of particular regulatory initiatives, the likelihood of realizing estimates for legal and environmental contingencies and the probability of recovering costs and investments in both the regulated utility and non-utility business segments.
We have identified the following critical accounting policies that require our judgment and estimation, where the resulting estimates may have a material effect on the consolidated financial statements:
| accounting for unbilled revenue; |
| accounting for regulatory operations regulatory assets and liabilities; |
| accounting for income taxes; |
44
WGL Holdings, Inc.
Washington Gas Light Company
Part IFinancial Information
Item 2Managements Discussion and Analysis of
Financial Condition and Results of Operations (continued)
| accounting for contingencies; |
| accounting for derivative and fair value instruments; |
| accounting for pension and other post-retirement benefit plans and |
| accounting for stock-based compensation. |
For a description of these critical accounting policies, refer to Managements Discussion within the 2013 Annual Report. There were no new critical accounting policies or changes to our critical accounting policies during the three month period ended December 31, 2013.
45
WGL Holdings, Inc.
Washington Gas Light Company
Part IFinancial Information
Item 2Managements Discussion and Analysis of
Financial Condition and Results of Operations (continued)
RESULTS OF OPERATIONS
We analyze the operating results using utility net revenues for the regulated utility segment and gross margins for the retail energy-marketing segment. Both utility net revenues and gross margins are calculated as revenues less the associated cost of energy and applicable revenue taxes. We believe utility net revenues is a better measure to analyze profitability than gross operating revenues for our regulated utility segment because the cost of the natural gas commodity and revenue taxes are generally included in the rates that Washington Gas charges to customers as reflected in operating revenues. Accordingly, changes in the cost of gas and revenue taxes associated with sales made to customers generally have no direct effect on utility net revenues, operating income or net income. We consider gross margins to be a better reflection of profitability than gross revenues or gross energy costs for our retail energy-marketing segment because gross margins are a direct measure of the success of our core strategy for the sale of natural gas and electricity.
Neither utility net revenues nor gross margins should be considered as an alternative to, or a more meaningful indicator of our operating performance, than net income. Our measures of utility net revenues and retail energy-marketing gross margins may not be comparable to similarly titled measures of other companies. Refer to the sections entitled Results of OperationsRegulated Utility Operating Results and Results of OperationsRetail Energy-Marketing for the calculation of utility net revenues and gross margins, respectively, as well as a reconciliation to operating income and net income for both segments.
Summary Results
WGL reported net income of $18.6 million for the three months ended December 31, 2013, compared to net income of $52.4 million reported for the same period of the prior fiscal year. For the three month period ended December 31, 2013 and 2012, we earned a return on average common equity of 3.4% and 11.2%, respectively.
The following table summarizes our net income (loss) by operating segment for the three months ended December 31, 2013 and 2012.
Net Income (Loss) by Operating Segment | ||||||||||||
Three Months Ended December 31, |
Increase/ | |||||||||||
(In millions) | 2013 | 2012 | (Decrease) | |||||||||
Regulated Utility |
$ | 38.7 | $ | 38.7 | $ | | ||||||
Non-utility operations: |
||||||||||||
Retail Energy-Marketing |
3.3 | 13.0 | (9.7 | ) | ||||||||
Commercial Energy Systems |
(0.1 | ) | 1.0 | (1.1 | ) | |||||||
Midstream Energy Services |
(21.8 | ) | 1.3 | (23.1 | ) | |||||||
Other Activities |
(1.7 | ) | (1.6 | ) | (0.1 | ) | ||||||
Total non-utility |
(20.3 | ) | 13.7 | (34.0 | ) | |||||||
Intersegment Eliminations |
$ | 0.2 | $ | | $ | 0.2 | ||||||
Net income applicable to common stock |
$ | 18.6 | $ | 52.4 | $ | (33.8 | ) | |||||
EARNINGS PER AVERAGE COMMON SHARE |
||||||||||||
Basic |
$ | 0.36 | $ | 1.01 | $ | (0.65 | ) | |||||
Diluted |
$ | 0.36 | $ | 1.01 | $ | (0.65 | ) | |||||
46
WGL Holdings, Inc.
Washington Gas Light Company
Part IFinancial Information
Item 2Managements Discussion and Analysis of
Financial Condition and Results of Operations (continued)
Regulated Utility Operating Results
The following table summarizes the Regulated Utility segments operating results for the three months ended December 31, 2013 and 2012.
Regulated Utility Operating Results
Three Months Ended December 31, |
Increase/ | |||||||||||
(In millions) | 2013 | 2012 | Decrease | |||||||||
Utility net revenues: |
||||||||||||
Operating revenues |
$ | 390.4 | $ | 355.8 | $ | 34.6 | ||||||
Less: Cost of gas |
190.7 | 150.4 | 40.3 | |||||||||
Revenue taxes |
24.7 | 24.2 | 0.5 | |||||||||
Total utility net revenues |
175.0 | 181.2 | (6.2 | ) | ||||||||
Operation and maintenance |
71.3 | 69.7 | 1.6 | |||||||||
Depreciation and amortization |
25.3 | 26.8 | (1.5 | ) | ||||||||
General taxes and other assessments |
12.8 | 12.3 | 0.5 | |||||||||
Operating income |
65.6 | 72.4 | (6.8 | ) | ||||||||
Other expense net, including preferred stock dividends |
(0.5 | ) | (0.1 | ) | (0.4 | ) | ||||||
Interest expense |
8.9 | 9.1 | (0.2 | ) | ||||||||
Income tax expense |
17.5 | 24.5 | (7.0 | ) | ||||||||
Net income applicable to common stock |
$ | 38.7 | $ | 38.7 | $ | | ||||||
The Regulated Utility segments net income applicable to common stock was $38.7 million for both the three months ended December 31, 2013 and 2012. The comparison primarily reflects the following:
| higher revenues related to growth of more than 11,900 average active customer meters; |
| higher revenues due to new base rates in the District of Columbia and Maryland; |
| higher revenues due to accelerated pipe replacement programs; |
| higher revenues due to favorable effects of natural gas consumption patterns; |
| higher realized margins associated with our asset optimization program; and a |
| decrease in the effective tax rate including reinstatement of regulatory assets related to the tax effect of Med D. |
Offsetting these favorable variances were:
| lower unrealized margins associated with our asset optimization program; |
| an increase in operating costs; |
| in higher property taxes; and an |
| impairment of the old operations center. |
Utility Net Revenues. The following table provides the key factors contributing to the changes in the utility net revenues of the Regulated Utility segment between the three months ended December 31, 2013 and 2012.
47
WGL Holdings, Inc.
Washington Gas Light Company
Part IFinancial Information
Item 2Managements Discussion and Analysis of
Financial Condition and Results of Operations (continued)
Composition of Changes in Utility Net Revenues
(In millions) | Increase/ (Decrease) |
|||
Customer growth |
$ | 2.0 | ||
Estimated weather effects |
1.3 | |||
Natural gas consumption patterns |
0.9 | |||
Impact of rate cases |
2.7 | |||
Storage carrying costs |
0.8 | |||
Accelerated pipe replacement programs |
1.1 | |||
Asset optimization: |
||||
Realized margins |
2.6 | |||
Unrealized mark-to-market valuations |
(17.5 | ) | ||
Other |
(0.1 | ) | ||
Total |
$ | (6.2 | ) | |
Customer growth Average active customer meters increased by more than 11,900 for the three months ended December 31, 2013 compared to the same period of the prior fiscal year.
Estimated weather effects Weather, when measured by HDDs, was 3.7% colder and 2.9% warmer than normal for the three months ended December 31, 2013 and 2012, respectively (refer to the section entitled Weather Risk for further discussion of our weather protection strategy).
Natural gas consumption patterns The variance in net revenues reflects the changes in natural gas consumption patterns. These changes may be affected by shifts in weather patterns in which customer heating usage may not correlate highly with average historical levels of usage per heating degree days. Natural gas consumption patterns may also be affected by non-weather related factors such as customer conservation.
Impact of rate cases New base rates were approved in the District of Columbia and Maryland effective June 4, 2013 and November 23, 2013, respectively.
Storage carrying costs Each jurisdiction provides for the recovery of carrying costs based on the cost of capital in each jurisdiction, multiplied by the monthly average balance of storage gas inventory. The three month comparisons reflect higher average storage gas inventory investment balances primarily due to higher weighted average cost of gas in inventory.
Accelerated pipe replacement programs Revenues increased related to the return on investment and recovery of costs associated with an accelerated pipeline replacement program in Virginia and a targeted mechanically coupled pipe replacement and encapsulation program in the District of Columbia.
Asset optimization We recorded net unrealized losses associated with our energy-related derivatives of $26.2 million for the three months ended December 31, 2013, compared to unrealized losses of $8.7 million reported for the same period of the prior fiscal year. When these derivatives settle, any unrealized amounts will ultimately reverse and Washington Gas will realize margins in combination with related transactions that these derivatives economically hedge. Washington Gas recorded no lower-of-cost or market adjustments related to its storage gas inventory during the three months ended December 31, 2013 or 2012. Refer to the section entitled Market RiskPrice Risk Related to the Regulated Utility Segment for further discussion of our asset optimization program.
Operation and Maintenance Expenses. The following table provides the key factors contributing to the changes in operation and maintenance expenses of the Regulated Utility for the three months ended December 31, 2013 and 2012.
48
WGL Holdings, Inc.
Washington Gas Light Company
Part IFinancial Information
Item 2Managements Discussion and Analysis of
Financial Condition and Results of Operations (continued)
Composition of Changes in Operation and Maintenance Expenses
(In millions) | Increase/ (Decrease) |
|||
Employee benefits |
$ | (1.4 | ) | |
Operation, engineering, compliance and safety |
2.0 | |||
Weather-related instruments: |
||||
Loss |
0.6 | |||
Impairment loss on Springfield Operations Center |
0.8 | |||
Uncollectible accounts |
(0.6 | ) | ||
Other operating expenses |
0.2 | |||
Total |
$ | 1.6 | ||
Employee benefits The decrease in employee benefits expense reflects lower pension, other post-retirement employee benefits and workers compensation expenses due to changes in plan assumptions used to measure the benefit obligation partially offset by the amortization of the regulatory asset authorized in rates by the District of Columbia.
Operation, engineering, compliance and safety Washington Gas incurred higher maintenance costs for the three months ended December 31, 2013 than for the same period in the previous year.
Weather-related instruments Washington Gas did not use any weather-related instruments during the three months ended December 31, 2013. During the three months ended December 31, 2012, Washington Gas used HDD weather related instruments to manage its financial exposure to variations from normal weather in the District of Columbia. Washington Gas recorded a gain of $0.6 million related to these instruments during the three months ended December 31, 2012 (refer to the section entitled Weather Risk for further discussion of our weather protection strategy).
Impairment loss on Springfield Operations Center On December 31, 2013, Washington Gas incurred a $0.8 million impairment loss on a previous operations facility by reducing the carrying amount of $22.3 million down to its fair value of $21.5 million based on the progress in the efforts to sell the property. There were no impairment indications for the three months ended December 31, 2012.
Uncollectible accounts The decrease in uncollectible accounts is due to a reduction in customer delinquencies and charge-offs.
49
WGL Holdings, Inc.
Washington Gas Light Company
Part IFinancial Information
Item 2Managements Discussion and Analysis of
Financial Condition and Results of Operations (continued)
Retail Energy-Marketing
The following table depicts the Retail Energy-Marketing segments operating results along with selected statistical data.
Retail Energy-Marketing Financial and Statistical Data
Three Months Ended December 31, |
Increase / | |||||||||||
2013 | 2012 | (Decrease) | ||||||||||
Operating Results (In millions) |
||||||||||||
Gross margins: |
||||||||||||
Operating revenues |
$ | 322.9 | $ | 324.1 | $ | (1.2 | ) | |||||
Less: Cost of energy |
303.3 | 290.1 | 13.2 | |||||||||
Revenue taxes |
1.9 | 1.4 | 0.5 | |||||||||
Total gross margins |
17.7 | 32.6 | (14.9 | ) | ||||||||
Operation expenses |
11.2 | 11.4 | (0.2 | ) | ||||||||
Depreciation and amortization |
0.2 | 0.2 | | |||||||||
General taxes and other assessments |
1.1 | 0.9 | 0.2 | |||||||||
Operating income |
5.2 | 20.1 | (14.9 | ) | ||||||||
Other income net |
0.1 | | 0.1 | |||||||||
Income tax expense |
2.0 | 7.1 | (5.1 | ) | ||||||||
Net income |
$ | 3.3 | $ | 13.0 | $ | (9.7 | ) | |||||
Analysis of gross margins (In millions) |
||||||||||||
Natural gas |
||||||||||||
Realized margins |
$ | 9.3 | $ | 12.6 | $ | (3.3 | ) | |||||
Unrealized mark-to-market gains (losses) |
4.2 | (2.9 | ) | 7.1 | ||||||||
Total gross margins natural gas |
13.5 | 9.7 | 3.8 | |||||||||
Electricity |
||||||||||||
Realized margins |
4.5 | 18.3 | (13.8 | ) | ||||||||
Unrealized mark-to-market gains (losses) |
(0.3 | ) | 4.6 | (4.9 | ) | |||||||
Total gross margins electricity |
4.2 | 22.9 | (18.7 | ) | ||||||||
Total gross margins |
$ | 17.7 | $ | 32.6 | $ | (14.9 | ) | |||||
Other Retail Energy-Marketing Statistics |
||||||||||||
Natural gas |
||||||||||||
Therm sales (millions of therms) |
210.6 | 210.9 | (0.3 | ) | ||||||||
Number of customers (end of period) |
168,000 | 174,000 | (6,000 | ) | ||||||||
Electricity |
||||||||||||
Electricity sales (millions of kWhs) |
2,828.4 | 2,803.7 | 24.7 | |||||||||
Number of accounts (end of period) |
189,000 | 186,800 | 2,200 | |||||||||
The Retail Energy-Marketing segment reported net income of $3.3 million for the three months ended December 31, 2013, compared to net income of $13.0 million reported for the same period of the prior fiscal year.
The decrease in net income primarily reflects lower gross margins from electric sales. Period-to-period comparisons of quarterly gross margins for this segment can vary significantly and are not necessarily representative of expected annualized results.
Gross margins from natural gas sales increased by $3.8 million for the three months ended December 31, 2013, compared to the same period in the prior fiscal year. This comparison reflects an increase of $7.1 million in unrealized mark-to-market gains resulting from fluctuating market prices in the current quarter versus the same quarter of the prior year partially offset by lower realized margins of $3.3 million. The decrease is principally due to the recognition of a favorable adjustment to gas supply costs in the prior year.
Gross margins from electric sales decreased by $18.7 million for the three months ended December 31, 2013, compared to the same period of the prior fiscal year. This comparison reflects lower realized electric retail margins of $13.8 million compared to the same quarter in the prior year due to higher ancillary services charges from the regional power grid operator (PJM) associated with fixed price retail contracts, lower realized unit margins from large commercial customers due to competitive pressures in certain markets and a decrease of $4.9 million in unrealized mark-to-market valuations due to fluctuating market prices.
Commercial Energy Systems
For the quarter ended December 31, 2013, the commercial energy systems segment reported a net loss of $0.1 million, compared to net income of $1.0 million for the same quarter of the prior fiscal year. This decrease is primarily due to lower income from government agency customers as a result of projects progressing more slowly than the same period of the prior fiscal year.
50
WGL Holdings, Inc.
Washington Gas Light Company
Part IFinancial Information
Item 2Managements Discussion and Analysis of
Financial Condition and Results of Operations (continued)
Midstream Energy Services
The Midstream Energy Services segment reported a net loss of $21.8 million for the three months ended December 31, 2013, compared to net income of $1.3 million reported for the same period of the prior fiscal year. This decrease is due to higher unrealized losses on derivative instruments which reduced margins by $22.6 million and lower gross margins due to unfavorable storage spreads, partially offset by lower operation and maintenance expenses. The higher unrealized losses relate to the GAAP accounting treatment of long-dated supply contracts linked to existing transportation contracts and are not expected to be actualized.
Other Non-Utility Activities
Transactions that are not significant enough on a stand-alone basis to warrant treatment as an operating segment, and that do not fit into one of our four operating segments, are aggregated as Other Activities and included as part of non-utility operations. Results from our other non-utility activities reflect net losses of $1.7 million for the three months ended December 31, 2013, compared to net losses of $1.6 million reported for the same period of the prior fiscal year. The comparison reflects the positive impact of tax sharing allocations offset by corporate branding initiative costs and business development activities.
Intersegment Eliminations
Intersegment eliminations represents a timing difference between Commercial Energy Systems recognition of revenue for the sale of SRECs to Retail Energy-Marketings recognition of the associated expense. Retail Energy-Marketing has accrued expenses related to SRECs that are generated by Commercial Energy Systems but have not been transferred.
LIQUIDITY AND CAPITAL RESOURCES
General Factors Affecting Liquidity
Access to short-term debt markets is necessary for funding our short-term liquidity requirements, the most significant of which include buying natural gas, electricity, and pipeline capacity, and financing accounts receivable and storage gas inventory. Our need for access to long-term capital markets is driven primarily by capital expenditures, maturities of long-term debt, and the availability of government funding through deferred taxes.
During the three months ended December 31, 2013, WGL met its liquidity and capital needs through retained earnings and the issuance of commercial paper and common stock, and expects to do so for the remainder of fiscal year 2014. Washington Gas met its liquidity and capital needs through retained earnings, the sale of medium-term notes, and the issuance of commercial paper, and expects to do so during the remainder of fiscal year 2014.
Our ability to access capital markets depends on our credit ratings, general market liquidity, and investor demand for our securities. Our credit ratings depend largely on the financial performance of our subsidiaries, and a ratings downgrade could both increase our borrowing costs and trigger the need for posting additional collateral with our wholesale counterparties or other creditors. In support of our credit ratings, we have a goal to maintain our common equity ratio in the mid-50% range of total consolidated capital. As of December 31, 2013, total consolidated capitalization, including current maturities of long-term debt and excluding notes payable, comprised 65.9% common equity, 1.5% preferred stock and 32.6% long-term debt. The level of this ratio varies during the fiscal year due to the seasonal nature of our business. This seasonality also affects our short-term debt balances, which are typically higher in the fall and winter months and substantially lower in the spring when a significant portion of our current assets are converted into cash at the end of the heating season. Our cash flow requirements and our ability to provide satisfactory resources to meet those requirements are primarily influenced by the activities of Washington Gas, WGEServices, WGL Midstream, and, to a lesser extent, other non-utility operations.
Our plans provide for sufficient liquidity to satisfy our financial obligations. At December 31, 2013, we had no restrictions on our cash balances or retained earnings that would affect the payment of common or preferred stock dividends by either WGL or Washington Gas.
Short-Term Cash Requirements and Related Financing
Washington Gas, WGEServices and WGL Midstream have seasonal short-term cash requirements to fund the purchase of storage gas inventory in advance of the winter heating season. At December 31, 2013 and September 30, 2013, Washington Gas had balances in gas storage of $124.1 million and $132.2 million, respectively; WGEServices had balances
51
WGL Holdings, Inc.
Washington Gas Light Company
Part IFinancial Information
Item 2Managements Discussion and Analysis of
Financial Condition and Results of Operations (continued)
in gas storage of $35.0 million and $49.1 million, respectively; and WGL Midstream had balances in gas storage of $82.8 million and $166.0 million, respectively. Washington Gas collects the cost of gas under cost recovery mechanisms approved by its regulators. WGEServices collects revenues that are designed to reimburse commodity costs used to supply their retail customer and wholesale counterparty contracts. As market opportunities arise, WGL Midstream collects revenues in excess of its commodity costs through its wholesale counterparty contracts. WGEServices and WGL Midstream derive their funding to finance these activities from short-term debt issued by WGL. Additionally, Washington Gas, WGEServices and WGL Midstream may be required to post cash collateral for certain purchases. WGEServices and WGL Midstream may be required to provide parent guarantees from WGL for certain transactions.
Variations in the timing of collections under its gas cost recovery mechanisms can significantly affect Washington Gas short-term cash requirements. At December 31, 2013 and September 30, 2013, Washington Gas had $15.3 million net over-collections and $0.6 million net over-collections of gas costs, respectively, reflected in current assets/liabilities as gas costs due from/to customers. Most of the December 31, 2013 balance will be returned to customers in fiscal year 2014. Amounts under-collected or over-collected that are generated during the current gas cost recovery cycle are deferred as a regulatory asset or liability on the balance sheet until September 1 of each year, at which time the accumulated amount is transferred to gas costs due from/to customers as appropriate. At December 31, 2013 and September 30, 2013, Washington Gas had a net regulatory liability of $68.3 million and a net regulatory asset of $13.8 million, respectively, related to the current gas recovery cycle.
WGL and Washington Gas use short-term debt in the form of commercial paper or unsecured short-term bank loans to fund seasonal cash requirements. Our policy is to maintain back-up bank credit facilities in an amount equal to or greater than our expected maximum commercial paper position. Bank credit balances available to WGL and Washington Gas net of commercial paper balances were $194.7 million and $162.0 million at December 31, 2013 and $201.4 million and $225.5 million at September 30, 2013, respectively. The credit facility for WGL permits it to borrow up to $450.0 million, and further permits, with the banks approval, additional borrowings of $100.0 million for a maximum potential total of $550.0 million. The credit facility for Washington Gas permits it to borrow up to $350.0 million, and further permits, with the banks approval, additional borrowings of $100.0 million for a maximum potential total of $450.0 million. The interest rate on loans made under each of the credit facilities will be a fluctuating rate per annum that will be set using certain parameters at the time each loan is made. WGL and Washington Gas incur credit facility fees, which in some cases are based on the long-term debt ratings of Washington Gas. In the event that the long-term debt of Washington Gas is downgraded below certain levels, WGL and Washington Gas would be required to pay higher fees. There are five different levels of fees. The credit facility for WGL defines its applicable fee level as one level below the level applicable to Washington Gas. Under the terms of the credit facilities, the lowest level facility fee is 0.06% and the highest is 0.175%. These credit agreements provide for a term of five years and expire on April 3, 2017. The credit agreements each have two one-year extension options. Refer to Note 3Short-Term Debt of the Notes to the Consolidated Financial Statements for further information.
To manage credit risk, Washington Gas, WGEServices and WGL Midstream may require certain customers and suppliers to provide deposits, which are reported as current liabilities in Customer deposits and advance payments, in the accompanying balance sheets. At December 31, 2013 and September 30, 2013, Customer deposits and advance payments totaled $69.2 million and $67.2 million, respectively. For both periods, almost all of these deposits were from Washington Gas customers.
For Washington Gas, deposits from customers may be refunded at various times throughout the year based on the customers payment habits. At the same time, other customers make new deposits that cause the balance of customer deposits to remain relatively steady. There are no restrictions on Washington Gas use of these customer deposits. Washington Gas pays interest to its customers on these deposits in accordance with the requirements of its regulatory commissions.
For WGEServices and WGL Midstream, deposits typically represent collateral for transactions with wholesale counterparties. These deposits may be reduced, repaid or increased at any time based on the current value of WGEServices or WGL Midstreams net position with the counterparty. Currently, there are no restrictions on the use of deposited funds and interest is paid to the counterparty on these deposits in accordance with its contractual obligations. Refer to the section entitled Credit Risk for further discussion of our management of credit risk.
Long-Term Cash Requirements and Related Financing
Our long-term cash requirements primarily depend upon the level of capital expenditures and long-term debt maturities. Our capital expenditures primarily relate to adding new utility customers and system supply as well as maintaining the safety and reliability of Washington Gas distribution system. Refer to the section entitled Capital Expenditures for discussion of our capital expenditures forecast and our 2013 Annual Report for a discussion of our long-term debt maturities.
52
WGL Holdings, Inc.
Washington Gas Light Company
Part IFinancial Information
Item 2Managements Discussion and Analysis of
Financial Condition and Results of Operations (continued)
On December 5, 2013, Washington Gas issued $75.0 million of 5.00% fixed MTNs with a thirty year maturity due December 15, 2043. On July 18, 2013, in anticipation of the issuance, we entered into a forward starting swap to mitigate a substantial portion of the risk of rising interest rates. The swap was terminated on December 2, 2013 at a gain to Washington Gas of $1.2 million. The estimated effective cost of the notes, after consideration of issuance discount, underwriter fees and hedge gain, is 4.95%. For further discussion of our management of interest-rate risk, refer to Managements Discussion in our 2013 Annual Report.
Security Ratings
The table below reflects the current credit ratings for the outstanding debt instruments of WGL and Washington Gas. Changes in credit ratings may affect WGLs and Washington Gas cost of short-term and long-term debt and our access to the capital markets. A security rating is not a recommendation to buy, sell or hold securities. The rating may be subject to revision or withdrawal at any time by the assigning rating organization and each rating should be evaluated independently of any other rating.
Credit Ratings for Outstanding Debt Instruments | ||||||||
WGL | Washington Gas | |||||||
Rating Service | Unsecured Medium-Term |
Commercial Paper |
Unsecured Medium-Term |
Commercial Paper | ||||
Fitch Ratings(b) |
A+ | F1 | AA | F1 | ||||
Moodys Investors Service(c) |
Not Rated | P-2 | A2 | P-1 | ||||
Standard & Poors Ratings Services(d) |
A+ | A-1 | A+ | A-1 | ||||
(a) | Indicates the ratings that may be applicable if WGL were to issue unsecured MTNs. |
(b) | The long-term debt ratings outlook issued by Fitch Ratings for WGL and Washington Gas is stable. |
(c) | The long-term debt ratings outlook issued by Moodys Investors Service for Washington Gas is stable. |
(d) | The long-term debt ratings outlook issued by Standard & Poors Rating Services for WGL and Washington Gas is stable. |
Ratings Triggers and Certain Debt Covenants
Under the terms of WGLs and Washington Gas credit agreements, the ratio of consolidated financial indebtedness to consolidated total capitalization cannot exceed 0.65 to 1.0 (65.0%). In addition, WGL and Washington Gas are required to inform lenders of changes in corporate existence, financial conditions, litigation, and environmental warranties that might have a material effect on debt ratings. The failure to inform the lenders agent of material changes in these areas might constitute default under the agreements. Additionally, failure to pay principal or interest on any other indebtedness may be deemed a default under our credit agreements. A default, if not remedied, may lead to a suspension of further loans and/or acceleration in which obligations become immediately due and payable. At December 31, 2013, we were in compliance with all of the covenants under our revolving credit facilities.
For certain of its natural gas purchase and pipeline capacity agreements, if the long-term debt of Washington Gas is downgraded to or below the lower of a BBB- rating by Standard & Poors or a Baa3 rating by Moodys Investors Service, or if Washington Gas is deemed by a counterparty not to be creditworthy, then the counterparty may withhold service or deliveries, or may require additional credit support. For certain other agreements, if the counterpartys credit exposure to Washington Gas exceeds a contractually defined threshold amount, or if Washington Gas credit rating declines by a certain rating level, then the counterparty may require additional credit support. At December 31, 2013, Washington Gas would not be required to provide additional credit support by these arrangements if its long-term credit rating was to be downgraded by one rating level.
WGL guarantees payments for certain purchases of natural gas and electricity on behalf of WGEServices and WGL Midstream (refer to our 2013 Annual Report for a further discussion of these guarantees). If the credit rating of WGL declines, WGEServices and WGL Midstream may be required to provide additional credit support for these purchase contracts. At December 31, 2013, WGES would be required to provide $0.1 million in additional credit support for these arrangements if the long-term credit rating of WGL was to be downgraded by one rating level. WGL Midstream would not be required to provide any additional credit support.
53
WGL Holdings, Inc.
Washington Gas Light Company
Part IFinancial Information
Item 2Managements Discussion and Analysis of
Financial Condition and Results of Operations (continued)
Historical Cash Flows
The following table summarizes the net cash provided by (used in) operating, investing and financing activities for the three months ended December 31, 2013 and 2012:
Three Months Ended December 31, | ||||||||
2013 | 2012 | |||||||
(In millions) |
||||||||
Cash provided by (used in): |
||||||||
Operating activities |
$ | (12.6 | ) | $ | (17.0 | ) | ||
Investing activities |
(73.8 | ) | (83.4 | ) | ||||
Financing activities |
87.8 | 94.7 |
Cash Flows Used in Operating Activities
The regulated utilitys cash flows from operating activities principally reflect gas sales and deliveries and cost of operations. The volume of gas sales and deliveries is dependent primarily on factors external to the utility, such as growth of customer demand, weather, market prices for energy, economic conditions and measures that promote energy efficiency. Under the RNA, WNA, CRA and decoupling mechanisms in place, changes in delivery volumes from levels assumed when rates were approved may affect the timing of cash flows but not net income. The price at which the utility provides energy to customers is determined in accordance with rate agreements. In general, changes in the utilitys cost of purchased power, fuel and gas may affect the timing of cash flows but not net income because the costs are recovered in accordance with rate agreements. In addition, the regulated utilitys cash flow is impacted by the timing of derivative settlements.
The non-utility cash flows from operating activities primarily reflect the timing of receipts related to solar and federal projects at commercial energy systems and the timing of receipts related to electric and gas bills for retail-energy marketing. The timing of gas purchases resulting from asset optimization arrangements affect midstream energy services.
Net income is the result of cash and non- cash (or accrual) transactions. Only cash transactions affect the WGLs cash flows from operating activities. Principal non- cash charges include depreciation and deferred income tax expense. Principal non- cash credits include amortizations of certain net regulatory liabilities. Non- cash charges or credits may also be accrued under the revenue decoupling and cost reconciliation mechanisms in the utilities rate plans.
Net cash flows used in operating activities for the three months ended December 31, 2013 was $12.6 million compared to $17.0 million for the three months ended December 31, 2012. The change in net cash flows reflects the timing of payments for and recovery of energy costs. This timing is reflected within changes to accounts receivable, recoverable energy costs and accounts payable balances.
The changes in regulatory assets principally reflect changes in deferred pension costs in accordance with the accounting rules for retirement benefits.
Cash Flows Used in Investing Activities
During the three months ended December 31, 2013, cash flows used in investing activities totaled $73.8 million, which primarily consists of capital expenditures made on behalf of Washington Gas. In addition, investing activities also reflects additional investments in commercial Solar PV facilities, a partnership and other financing vehicles to directly fund residential Solar PV projects.
During the three months ended December 31, 2012, cash flows used in investing activities totaled $83.4 million, which primarily consists of capital expenditures made on behalf of Washington Gas. In addition, investing activities also reflects additional investments in commercial Solar PV facilities and investments in a partnership to directly fund residential Solar PV projects.
54
WGL Holdings, Inc.
Washington Gas Light Company
Part IFinancial Information
Item 2Managements Discussion and Analysis of
Financial Condition and Results of Operations (continued)
Cash Flows Provided by Financing Activities
Cash flows provided by financing activities totaled $87.8 million for the three months ended December 31, 2013, reflecting the net issuance of $108.5 million of notes payable and long-term debt offset by dividends on common and preferred stock of $22.1 million.
Cash flows provided by financing activities totaled $94.7 million for the three months ended December 31, 2012, reflecting the issuance of $113.7 million of notes payable, partially offset by dividends on common and preferred stock of $19.7 million.
CONTRACTUAL OBLIGATIONS, OFF-BALANCE SHEET ARRANGEMENTS, AND OTHER COMMERCIAL COMMITMENTS
Contractual Obligations
WGL and Washington Gas have certain contractual obligations incurred in the normal course of business that require fixed and determinable payments in the future. These commitments include long-term debt, lease obligations, unconditional purchase obligations for pipeline capacity, transportation and storage services, certain natural gas and electricity commodity commitments and our commitments related to the business process outsourcing program.
Reference is made to the Contractual Obligations, Off-Balance Sheet Arrangements and Other Commercial Commitments section of Managements Discussion in our 2013 Annual Report. Note 5 to the Consolidated Financial Statements in our 2013 Annual Report includes a discussion of long-term debt, including debt maturities. Note 13 to the Consolidated Financial Statements in our 2013 Annual Report reflects information about the various contracts of Washington Gas, WGEServices and WGL Midstream. Additionally, refer to Note 12 of the Notes to Consolidated Financial Statements in this quarterly report.
There have been no significant changes to contractual obligations in the three month period ended December 31, 2013.
Construction Project Financing
To fund certain of its construction projects, Washington Gas enters into financing arrangements with third party lenders. As part of these financing arrangements, Washington Gas customers agree to make principal and interest payments over time, typically beginning after the projects are completed. Washington Gas assigns these customer payment streams to the lender. As the lender funds the construction project, Washington Gas establishes a receivable representing its customers obligations to remit principal and interest and a long-term payable to the lender. When these projects are formally accepted by the customer as completed, Washington Gas transfers the ownership of the receivable to the lender and removes both the receivable and the long-term financing from its financial statements. As of December 31, 2013 and September 30, 2013, work on these construction projects that was not completed or accepted by customers was valued at $8.3 million and $6.7 million, respectively. These amounts are recorded on the balance sheet as a receivable in Deferred Charges and Other AssetsOther with the corresponding long-term obligation to the lender recorded under Long-term debt. At any time before these contracts are accepted by the customer, should there be a contract default, such as, among other things, a delay in completing the project, the lender may call on Washington Gas to fund the unpaid principal in exchange for which Washington Gas would receive the right to the stream of payments from the customer. Construction projects are financed primarily for government agencies, which Washington Gas considers to have minimal credit risk. Based on this assessment and previous collection experience, Washington Gas did not record any corresponding reserve for bad debts related to these receivables at December 31, 2013 or September 30, 2013.
Financial Guarantees
WGL has guaranteed payments primarily for certain purchase commitments on behalf of WGEServices and WGL Midstream. At December 31, 2013, these guarantees totaled $313.5 million and $185.7 million for WGEServices and WGL Midstream, respectively. The amount of such guarantees is periodically adjusted to reflect changes in the level of financial exposure related to these purchase commitments. We also receive financial guarantees or other collateral from counterparties when required by our credit policy (refer to the section entitled Credit Risk for a further discussion of our credit policy). WGL also issued guarantees totaling $7.8 million at December 31, 2013 on behalf of certain of our non-utility subsidiaries and unconsolidated investments associated with their banking transactions. Of the total guarantees of $507.0 million, $4.0 million expires in January 2014, $6.0 million expires in October 2014 and $0.5 million expires in September 2033. The remaining guarantees do not have specific maturity dates. For all of its financial guarantees, WGL may cancel any or all future obligations upon written notice to the counterparty, but WGL would continue to be responsible for the obligations created under the guarantees prior to the effective date of the cancellation.
55
WGL Holdings, Inc.
Washington Gas Light Company
Part IFinancial Information
Item 2Managements Discussion and Analysis of
Financial Condition and Results of Operations (continued)
Constitution Pipeline
In May 2013, WGL Midstream entered into an equity investment in Constitution Pipeline Company, LLC. The pipeline project is designed to transport at least 650,000 dekatherms of natural gas per day from the Marcellus region in northern Pennsylvania to major northeastern markets. Fully contracted with long-term commitments from established natural gas producers currently operating in Pennsylvania, the pipeline will originate from the Marcellus production areas in Susquehanna County, PA., and interconnect with the Iroquois Gas Transmission and Tennessee Gas Pipeline systems in Schoharie County, N.Y.
Constitution Pipeline LLC has extended the range for the pipelines target in-service date to late 2015 through 2016 as a result of a longer than expected regulatory and permitting process. An affiliate of Williams Partners will construct, operate and maintain the new 30-inch, 126-mile long transmission pipeline.
WGL Midstream will invest an estimated $68 million in the project for a 10% share in the pipeline venture. WGL Midstream joins Williams Partners L.P. (41% share), Cabot Oil and Gas Corporation (25% share) and Piedmont Natural Gas (24% share) in the project. In June 2013, Constitution Pipeline filed a formal certificate application with FERC.
CREDIT RISK
Wholesale Credit Risk
Certain wholesale suppliers that sell natural gas to any or all of Washington Gas, WGEServices and WGL Midstream may have relatively low credit ratings or may not be rated by major credit rating agencies.
Washington Gas enters into transactions with wholesale counterparties for the purpose of meeting firm ratepayer commitments, to optimize the value of its long-term capacity assets, and for hedging natural gas costs. In the event of a counterpartys failure to deliver contracted volumes of gas or fulfill its payment obligations, Washington Gas may incur losses that would typically be passed through to its sales customers under the purchased gas cost adjustment mechanisms. Washington Gas may be at risk for financial loss to the extent these losses are not passed through to its customers.
For WGEServices, any failure of wholesale counterparties to deliver natural gas or electricity under existing contracts could cause financial exposure for the difference between the price at which WGEServices has contracted to buy these commodities and their replacement cost from another supplier. To the extent that WGEServices sells natural gas to these wholesale counterparties, WGEServices may be exposed to payment risk if WGEServices is in a net receivable position. Additionally, WGEServices enters into contracts with counterparties to hedge the costs of natural gas and electricity. Depending on the ability of the counterparties to fulfill their commitments, WGEServices could be at risk for financial loss.
WGL Midstream enters into transactions with wholesale counterparties to optimize its portfolio of owned and managed natural gas assets. Any failure of wholesale counterparties to deliver natural gas under existing contracts could cause financial exposure for the difference between the price at which WGL Midstream has contracted to buy these commodities and their replacement cost. To the extent that WGL Midstream sells natural gas to these wholesale counterparties, WGL Midstream may be exposed to payment risk if it is in a net receivable position. In addition, WGL Midstream enters into contracts with counterparties to hedge the costs of natural gas. Depending on the ability of the counterparties to fulfill their commitments, WGL Midstream could be at risk for financial loss.
Washington Gas, WGEServices and WGL Midstream operate under an existing credit policy that is designed to mitigate credit risks through requirements for credit enhancements including, but not limited to, letters of credit, parent guarantees and cash collateral when deemed necessary. In accordance with this policy, Washington Gas, WGEServices and WGL Midstream have each obtained credit enhancements from certain of their counterparties. If certain counterparties or their guarantors meet the policys creditworthiness criteria, Washington Gas, WGEServices and WGL Midstream may grant unsecured credit to those counterparties or their guarantors. The creditworthiness of all counterparties is continuously monitored.
Washington Gas, WGEServices and WGL Midstream are also subject to the collateral requirements of their counterparties. At December 31, 2013, Washington Gas, WGEServices and WGL Midstream provided $3.8 million, $17.7 million and $9.6 million in cash collateral to counterparties, respectively.
56
WGL Holdings, Inc.
Washington Gas Light Company
Part IFinancial Information
Item 2Managements Discussion and Analysis of
Financial Condition and Results of Operations (continued)
The following table provides information on our credit exposure, net of collateral, to wholesale counterparties as of December 31, 2013 for Washington Gas, WGEServices and WGL Midstream, separately.
Credit Exposure to Wholesale Counterparties (In millions) |
||||||||||||||||||||
Rating(a) | Exposure Before Credit Collateral(b) |
Offsetting Credit Collateral Held(c) |
Net Exposure |
Number of Counterparties Greater Than 10%(d) |
Net Exposure of Counterparties Greater Than 10% |
|||||||||||||||
Washington Gas |
||||||||||||||||||||
Investment Grade |
$ | 8.4 | $ | | $ | 8.4 | 1 | $ | 3.6 | |||||||||||
Non-Investment Grade |
11.4 | 10.6 | 0.8 | 1 | 0.8 | |||||||||||||||
No External Ratings |
5.6 | | 5.6 | | | |||||||||||||||
WGEServices |
||||||||||||||||||||
Investment Grade |
$ | 0.7 | $ | | $ | 0.7 | 4 | $ | 0.7 | |||||||||||
Non-Investment Grade |
| | | | | |||||||||||||||
No External Ratings |
| | | | | |||||||||||||||
WGL Midstream |
||||||||||||||||||||
Investment Grade |
$ | 13.7 | $ | | $ | 13.7 | 1 | $ | 3.6 | |||||||||||
Non-Investment Grade |
| | | | | |||||||||||||||
No External Ratings |
8.7 | | 8.7 | 1 | 7.4 |
(a)Investment Grade is primarily determined using publicly available credit ratings of the counterparty. If the counter party has provided a guarantee by a higher-rated entity (e.g., its parent), it is determined based upon the rating of it guarantor. Included in Investment Grade are counterparties with a minimum Standard & Poors or Moodys Investor Service rating of BBB- or Baa3, respectively.
(b)Includes the net of all open positions on energy-related derivatives subject to mark-to-market accounting requirements, the net receivable/payable for realized transactions and net open positions for contracts designated as normal purchases and normal sales and not recorded on our balance sheet. Amounts due from counterparties are offset by liabilities payable to those counterparties to the extent that legally enforceable netting arrangements are in place.
(c) Represents cash deposits and letters of credit received from counterparties, not adjusted for probability of default.
(d) Using a percentage of the net exposure.
Retail Credit Risk
Washington Gas is exposed to the risk of non-payment of utility bills by certain of its customers. To manage this customer credit risk, Washington Gas may require cash deposits from its high-risk customers to cover payment of their bills until the requirements for the deposit refunds are met. In addition, Washington Gas implemented a POR program as approved by the PSC of MD, whereby it purchases receivables from participating energy marketers at approved discount rates. Under the program, Washington Gas is exposed to the risk of non-payment by the retail customers for these receivables. This risk is factored into the approved discount rate at which Washington Gas purchases the receivables.
WGEServices is also exposed to the risk of non-payment by its retail customers. WGEServices manages this risk by evaluating the credit quality of certain new customers as well as by monitoring collections from existing customers. To the extent necessary, WGEServices can obtain collateral from, or terminate service to, its existing customers based on credit quality criteria. In addition, WGEServices participates in POR programs with certain Maryland and Pennsylvania utilities, whereby it sells its receivables to various utilities at approved discount rates. Under the POR programs, WGEServices is exposed to the risk of non-payment by its retail customers for delivered commodities that have not yet been billed. Once the invoices are billed, however, the associated credit risk is assumed by the purchasing utilities. While participation in POR programs reduce the risk of collection and fixes a discount rate on the receivables, there is a risk that the discount rate paid to participate in the POR program will exceed the actual bad debt expense and billing fees associated with these receivables.
WGSW is indirectly subject to retail credit risk associated with non-payment by customers who lease solar equipment or maintain energy service agreements through ASD Solar LP, Skyline Innovations, Inc. and EchoFirst Finance Company LLC. This credit risk is mitigated with minimum credit quality criteria established in each of WGSWs agreements. These criteria must be satisfied for WGSW to participate in the project financing arrangement or partnership interest.
WGL Midstream is not subject to retail credit risk.
MARKET RISK
We are exposed to various forms of market risk including commodity price risk, weather risk and interest-rate risk. The following discussion describes these risks and our management of them.
57
WGL Holdings, Inc.
Washington Gas Light Company
Part IFinancial Information
Item 2Managements Discussion and Analysis of
Financial Condition and Results of Operations (continued)
Price Risk Related to the Regulated Utility Segment
Washington Gas faces price risk associated with the purchase and sale of natural gas. Washington Gas generally recovers the cost of the natural gas to serve customers through gas cost recovery mechanisms as approved in jurisdictional tariffs; therefore, a change in the price of natural gas generally has no direct effect on Washington Gas net income. However, Washington Gas is responsible for following competitive and reasonable practices in purchasing natural gas for its customers.
To manage price risk associated with its natural gas supply to its firm customers, Washington Gas: (i) actively manages its gas supply portfolio to balance sales and delivery obligations; (ii) injects natural gas into storage during the summer months when prices are historically lower, and withdraws that gas during the winter heating season when prices are historically higher and (iii) enters into hedging contracts and other contracts that qualify as derivative instruments related to the sale and purchase of natural gas.
Washington Gas executes commodity-related physical and financial contracts in the form of forward, futures and option contracts as part of an asset optimization program that is managed by its internal staff. These transactions are accounted for as derivatives. Under this program, Washington Gas realizes value from its long-term natural gas transportation and storage capacity resources when not being fully used to serve utility customers. Regulatory sharing mechanisms in all three jurisdictions allow the profit from these transactions to be shared between Washington Gas customers and shareholders.
The following two tables summarize the changes in the fair value of our net assets (liabilities) associated with the Regulated Utility segments energy-related derivatives during the nine months ended December 31, 2013:
Regulated Utility Segment
Changes in Fair Value of Energy-Related Derivatives
(In millions) |
||||
Net assets (liabilities) at September 30, 2013 |
$ | (107.7 | ) | |
Net fair value of contracts entered into during the period |
(1.4 | ) | ||
Other changes in net fair value |
(104.2 | ) | ||
Realized net settlement of derivatives |
4.2 | |||
Net assets (liabilities) at December 31, 2013 |
$ | (209.1 | ) | |
Regulated Utility Segment
Roll Forward of Energy-Related Derivatives
(In millions) |
||||
Net assets (liabilities) at September 30, 2013 |
$ | (107.7 | ) | |
Recorded to income |
(27.3 | ) | ||
Recorded to regulatory assets/liabilities |
(78.3 | ) | ||
Realized net settlement of derivatives |
4.2 | |||
Net assets (liabilities) at December 31, 2013 |
$ | (209.1 | ) | |
58
WGL Holdings, Inc.
Washington Gas Light Company
Part IFinancial Information
Item 2Managements Discussion and Analysis of
Financial Condition and Results of Operations (continued)
The maturity dates of our net assets (liabilities) associated with the Regulated Utility segments energy-related derivatives recorded at fair value at December 31, 2013, is summarized in the following table based on the level of the fair value calculation under ASC Topic 820:
Regulated Utility Segment
Maturity of Net Assets (Liabilities) Associated with our Energy-Related Derivatives
Years Ended September 30, | ||||||||||||||||||||||||||||
(In millions) | Total | Remainder 2014 |
2015 | 2016 | 2017 | 2018 | Thereafter | |||||||||||||||||||||
Level 1 Quoted prices in active markets |
$ | | $ | | $ | | $ | | $ | | $ | | $ | | ||||||||||||||
Level 2 Significant other observable inputs |
10.9 | (2.6 | ) | 2.4 | 11.0 | 0.1 | | | ||||||||||||||||||||
Level 3 Significant unobservable inputs |
(220.0 | ) | (16.8 | ) | (15.7 | ) | (27.3 | ) | (26.7 | ) | (16.5 | ) | (117.0 | ) | ||||||||||||||
Total net assets (liabilities) associated with our energy-related derivatives |
$ | (209.1 | ) | $ | (19.4 | ) | $ | (13.3 | ) | $ | (16.3 | ) | $ | (26.6 | ) | $ | (16.5 | ) | $ | (117.0 | ) | |||||||
Fair value changed due primarily to unfavorable movements in the unobservable inputs used in the valuation of long-dated forwards. We believe that this value is not reflective of our ultimate cash flows as these purchases are utilized in the optimization of our long-term natural gas transportation and storage capacity resources, which are not reflected at fair value. Refer to Note 8, Derivative and Weather-Related Instruments and Note 9, Fair Value Measurements of the Notes to Consolidated Financial Statements for a further discussion of our derivative activities and fair value measurements.
Price Risk Related to the Non-Utility Segments
Retail Energy-Marketing. Our retail energy-marketing subsidiary, WGEServices, sells natural gas and electricity to retail customers at both fixed and indexed prices. WGEServices must manage daily and seasonal demand fluctuations for these products with its suppliers. Price risk exists to the extent WGEServices does not closely match the timing and volume of natural gas and electricity it purchases with the related fixed price or indexed sales commitments. WGEServices risk management policies and procedures are designed to minimize this risk.
A portion of WGEServices annual natural gas sales volumes is subject to variations in customer demand associated with fluctuations in weather and other factors. Purchases of natural gas to fulfill retail sales commitments are generally made under fixed-volume contracts based on certain weather assumptions. If there is significant deviation from normal weather or from other factors that affect customer usage, purchase commitments may differ significantly from actual customer usage. To the extent that WGEServices cannot match its customer requirements and supply commitments, it may be exposed to commodity price and volume variances, which could negatively impact expected gross margins (refer to the section entitled Weather Risk for a further discussion of our management of weather risk). WGEServices manages these risks through the use of derivative instruments, including financial products.
WGEServices procures electricity supply under contract structures in which WGEServices assumes the responsibility of matching its customer requirements with its supply purchases. WGEServices assembles the various components of supply, including electric energy from various suppliers and capacity, ancillary services and transmission service from the PJM Interconnection, a regional transmission organization, in matching its customer requirements obligations. While the capacity and transmission costs within PJM are generally stable and identifiable several years into the future, the cost of ancillary services which support the reliable operation of the transmission system, fluctuate more frequently as changes occur in the balance between generation and the consumption mix within the electric system. WGEServices could be exposed to price risk associated with changes in ancillary costs due to lack of available forward market products to sufficiently hedge those risks.
To the extent WGEServices has not sufficiently matched its customer requirements with its supply commitment, it could be exposed to electricity commodity price risk. WGEServices may manage this risk through the use of derivative instruments, including financial products.
WGEServices electric business is also exposed to fluctuations in weather and varying customer usage. Purchases generally are made under fixed-price, fixed-volume contracts that are based on certain weather assumptions. If there are significant deviations in weather or usage from these assumptions, WGEServices may incur price and volume variances that could negatively impact expected gross margins (refer to the section entitled Weather Risk for a further discussion of our management of weather risk).
59
WGL Holdings, Inc.
Washington Gas Light Company
Part IFinancial Information
Item 2Managements Discussion and Analysis of
Financial Condition and Results of Operations (continued)
The following two tables summarize the changes in the fair value of our net assets (liabilities) associated with the Retail Energy-Marketing segments energy-related derivatives during the nine months ended December 31, 2013:
Retail Energy-Marketing Segment
Changes in Fair Value of Energy-Related Derivatives
(In millions) | ||||
Net liabilities at September 30, 2013 |
$ | (10.4 | ) | |
Net fair value of contracts entered into during the period |
0.6 | |||
Other changes in net fair value |
1.6 | |||
Realized net settlement of derivatives |
0.9 | |||
Net assets (liabilities) at December 31, 2013 |
$ | (7.3 | ) | |
Retail Energy-Marketing Segment
Roll Forward of Energy-Related Derivatives
(In millions) | ||||
Net liabilities at September 30, 2013 |
$ | (10.4 | ) | |
Recorded to income |
3.0 | |||
Recorded to accounts payable |
(0.8 | ) | ||
Realized net settlement of derivatives |
0.9 | |||
Net assets (liabilities) at December 31, 2013 |
$ | (7.3 | ) | |
The maturity dates of our net assets (liabilities) associated with the Retail Energy-Marketing segments energy-related derivatives recorded at fair value at December 31, 2013 is summarized in the following table based on the level of the fair value calculation under ASC Topic 820:
Retail Energy-Marketing Segment
Maturity of Net Assets (Liabilities) Associated with our Energy-Related Derivatives
Years Ended September 30, | ||||||||||||||||||||||||||||
(In millions) | Total |
Remainder 2014 |
2015 |
2016 |
2017 |
2018 | Thereafter | |||||||||||||||||||||
Level 1 Quoted prices in active markets |
$ | | $ | | $ | | $ | | $ | | $ | | $ | | ||||||||||||||
Level 2 Significant other observable inputs |
(8.3 | ) | (5.6 | ) | (1.8 | ) | (0.9 | ) | | | | |||||||||||||||||
Level 3 Significant unobservable inputs |
1.0 | 3.7 | (2.2 | ) | (0.5 | ) | | | | |||||||||||||||||||
Total net assets (liabilities) associated with our energy-related derivatives |
$ | (7.3 | ) | $ | (1.9 | ) | $ | (4.0 | ) | $ | (1.4 | ) | $ | | $ | | $ | | ||||||||||
Refer to Note 8, Derivative and Weather-Related Instruments and Note 9, Fair Value Measurements of the Notes to Consolidated Financial Statements for a further discussion of our derivative activities and fair value measurements.
Midstream Energy Services. WGL Midstream engages in wholesale commodity transactions to optimize its owned and managed natural gas assets. Price risk exists to the extent WGL Midstream does not closely match the volume of physical natural gas it purchases with the related forward sales entered into as hedges. WGL Midstreams risk management policies and procedures are designed to minimize this risk. Depending upon the nature of its forward hedges, WGL Midstream may also be exposed to fluctuations in mark-to-market valuations based on changes in forward price curves. WGL Midstream pays fixed fair market prices for its owned storage assets and is subject to variations in annual summer-winter spreads associated with weather and other market factors. To the extent there are significant variations in weather, WGL Midstream may incur price variances that negatively impact expected gross margins (refer to the section entitled Weather Risk for a further discussion of our management of weather risk). WGL Midstream manages this risk through the use of derivative instruments, including financial products.
The following two tables summarize the changes in the fair value of our net assets (liabilities) associated with the Midstream Energy Services segments energy-related derivatives during the three months ended December 31, 2013:
60
WGL Holdings, Inc.
Washington Gas Light Company
Part IFinancial Information
Item 2Managements Discussion and Analysis of
Financial Condition and Results of Operations (continued)
Midstream Energy Services Segment
Changes in Fair Value of Energy-Related Derivatives
(In millions) | ||||
Net assets at September 30, 2013 |
$ | (10.5 | ) | |
Net fair value of contracts entered into during the period |
(17.6 | ) | ||
Other changes in net fair value |
(17.5 | ) | ||
Realized net settlement of derivatives |
1.8 | |||
Net assets (liabilities) at December 31, 2013 |
$ | (43.8 | ) | |
Midstream Energy Services Segment
Roll Forward of Energy-Related Derivatives
(In millions) | ||||
Net assets at September 30, 2013 |
$ | (10.5 | ) | |
Recorded to income |
(35.1 | ) | ||
Realized net settlement of derivatives |
1.8 | |||
Net assets (liabilities) at December 31, 2013 |
$ | (43.8 | ) | |
The maturity dates of our net assets (liabilities) associated with the Midstream Energy Services segments energy-related derivatives recorded at fair value at December 31, 2013 is summarized in the following table based on the level of the fair value calculation under ASC Topic 820:
Midstream Energy Services Segment
Maturity of Net Assets (Liabilities) Associated with our Energy-Related Derivatives
Years Ended September 30, | ||||||||||||||||||||||||||||
(In millions) | Total | Remainder 2014 |
2015 | 2016 | 2017 | 2018 | Thereafter | |||||||||||||||||||||
Level 1 Quoted prices in active markets |
$ | | $ | | $ | | $ | | $ | | $ | | $ | | ||||||||||||||
Level 2 Significant other observable inputs |
3.4 | 3.4 | | | | | | |||||||||||||||||||||
Level 3 Significant unobservable inputs |
(47.2 | ) | (0.1 | ) | | (5.8 | ) | (6.1 | ) | (4.6 | ) | (30.6 | ) | |||||||||||||||
Total net assets associated with our energy-related derivatives |
$ | (43.8 | ) | $ | 3.3 | $ | | $ | (5.8 | ) | $ | (6.1 | ) | $ | (4.6 | ) | $ | (30.6 | ) | |||||||||
Fair value changed primarily due to projected unfavorable movements in unobservable inputs used in the valuation of long-dated forward contracts. We believe that this value is not reflective of our ultimate cash flows as these purchases are utilized in the optimization of our long-term natural gas transportation and storage capacity resources, which are not reflected at fair value.
Value-at-Risk
WGEServices measures the market risk of its energy commodity portfolio by determining its value-at-risk. Value-at-risk is an estimate of the maximum loss that can be expected at some level of probability if a portfolio is held for a given time period. The value-at-risk calculation for natural gas and electric portfolios include assumptions for normal weather, new customers and renewing customers for which supply commitments have been secured. Based on a 95% confidence interval for a one-day holding period, WGEServices value-at-risk at December 31, 2013 was approximately $18,700 and $20,900, related to its natural gas and electric portfolios, respectively. At September 30, 2013, WGEServices value-at-risk was approximately $14,900 and $36,100, related to its natural gas and electric portfolios, respectively. At December 31, 2013, the high, low and average value-at-risk for natural gas are noted in the table below.
WGEServices
Value-at-Risk at December 31, 2013
(In thousands) | High | Low | Average | |||||||||
Natural Gas |
$ | 30.9 | $ | 13.9 | $ | 18.1 | ||||||
Electric Portfolio |
37.8 | 10.1 | 18.1 | |||||||||
Total |
$ | 68.7 | $ | 24.0 | $ | 36.2 | ||||||
61
WGL Holdings, Inc.
Washington Gas Light Company
Part IFinancial Information
Item 2Managements Discussion and Analysis of
Financial Condition and Results of Operations (continued)
Interest-Rate Risk
We are exposed to interest-rate risk associated with our short-term and long-term financing. WGL utilizes derivative instruments from time to time in order to minimize its exposure to the risk of interest-rate volatility.
Short-Term Debt. At December 31, 2013 and September 30, 2013, WGL and its subsidiaries had outstanding notes payable of $443.3 million and $373.1 million, respectively. The carrying amount of our short-term debt approximates fair value. In the current quarter, a change of 100 basis points in the underlying average interest rate for our short-term debt would have caused a change in interest expense of approximately $3.0 million.
Long-Term Debt. At December 31, 2013, we had outstanding fixed-rate MTNs and other long-term debt of $599.3 million, excluding current maturities and unamortized discounts. While fixed-rate debt does not expose us to earnings risk when market interest rates change, such debt is subject to changes in fair value. Fair value is defined as the present value of the debt securities future cash flows discounted at interest rates that reflect market conditions as of the measurement date. As of December 31, 2013, the fair value of our fixed-rate debt was $688.7 million. Our sensitivity analysis indicates that fair value would increase by approximately $29.0 million or decrease by approximately $26.8 million if interest rates were to decline or increase by 10%, respectively, from current market levels. In general, such an increase or decrease in fair value would impact earnings and cash flows only if Washington Gas were to reacquire some or all of these instruments in the open market prior to their maturity.
A total of $447.5 million, or approximately 75.7%, of Washington Gas outstanding MTNs, excluding current maturities, have make-whole call options which, if exercised, would require us to pay a premium over the face amount.
Derivative Instruments. Washington Gas utilizes derivative instruments from time to time in order to minimize its exposure to the risk of interest-rate volatility. On July 18, 2013, Washington Gas entered into a forward starting swap in anticipation of its December 2013 MTN issuance. The swap was terminated on December 2, 2013 at a gain to Washington Gas of $1.2 million. Refer to the section entitled Long-Term Cash Requirements and Related Financing for further discussion of our interest-rate risk management activity.
Weather Risk
We are exposed to various forms of weather risk in both our regulated utility and non-utility business segments. To the extent Washington Gas does not have weather related instruments or billing adjustment mechanisms in place, its revenues are volume driven and its current rates are based upon an assumption of normal weather. Without weather protection strategies, variations from normal weather will cause our earnings to increase or decrease depending on the weather pattern. Washington Gas currently has a weather protection strategy that is designed to neutralize the estimated financial effects of weather on its net income for Virginia and Maryland. In the District of Columbia, we have an open WNA filing, and due to recent rate case decisions and the pricing environment, we did not hedge against exposure to weather in the District of Columbia during the quarter ended December 31, 2013.
The financial results of our retail energy-marketing business, WGEServices, are affected by variations from normal weather primarily in the winter relating to its natural gas sales, and throughout the fiscal year relating to its electricity sales. WGEServices manages these weather risks with, among other things, weather related instruments.
Variations from normal weather may also affect the financial results of our wholesale energy business, WGL Midstream, primarily with regards to summer-winter storage spreads and in transportation spreads throughout the fiscal year. WGL Midstream manages these weather risks with, among other things, locational, physical and financial basis hedging.
Billing Adjustment Mechanisms. In Maryland, Washington Gas has a Revenue Normalization Adjustment (RNA) billing mechanism that is designed to stabilize the level of net revenues collected from Maryland customers by eliminating the effect of deviations in customer usage caused by variations in weather from normal levels and other factors such as conservation. In Virginia, Washington Gas has a Weather Normalization Adjustment (WNA) billing adjustment mechanism that is designed to eliminate the effect of variations in weather from normal levels on utility net revenues. Additionally, as part of the Conservation and Ratemaking Efficiency (CARE) plan, Washington Gas has a Care Ratemaking Adjustment (CRA) mechanism, which, coupled with the WNA, eliminates the effect of both weather and other factors such as conservation for residential customers in Virginia. For a discussion of current rates and regulatory matters, refer to the section entitled Rates and Regulatory Matters in Managements Discussion for Washington Gas.
For the RNA, WNA, and CRA mechanisms, periods of colder-than-normal weather generally would cause Washington Gas to record a reduction to its revenues and establish a refund liability to customers, while the opposite would generally result during periods of warmer-than-normal weather. However, factors such as volatile weather patterns and customer conservation may cause the RNA and the CRA mechanisms to function conversely because they adjust billed revenues to provide a designed level of net revenue per meter.
Weather Derivatives. WGEServices utilizes HDD instruments from time to time to manage weather risks related to its natural gas and electricity sales. WGEServices also utilizes cooling degree day (CDD) instruments and other instruments to
62
WGL Holdings, Inc.
Washington Gas Light Company
Part IFinancial Information
Item 2Managements Discussion and Analysis of
Financial Condition and Results of Operations (continued)
manage weather and price risks related to its electricity sales during the summer cooling season. These instruments cover a portion of WGEServices estimated revenue or energy-related cost exposure to variations in HDDs or CDDs. Refer to Note 8Derivatives of the Notes to Consolidated Financial Statements for further discussion of the accounting for these weather-related instruments.
63
WGL Holdings, Inc.
Washington Gas Light Company
Part IFinancial Information
Item 2Managements Discussion and Analysis of
Financial Condition and Results of Operations (continued)
This section of Managements Discussion focuses on Washington Gas for the reported periods. In many cases, explanations and disclosures for both WGL and Washington Gas are substantially the same.
RESULTS OF OPERATIONS
The results of operations for the Regulated Utility segment and Washington Gas are substantially the same; therefore, this section primarily focuses on statistical information and other information that is not discussed in the results of operations for the Regulated Utility segment. Refer to the section entitled Results of OperationsRegulated Utility in Managements Discussion for WGL for a detailed discussion of the results of operations for the Regulated Utility segment.
Washington Gas net income applicable to common stock was $38.5 million for the three months ended December 31, 2013, compared to net income of $38.4 million reported for the same period of the prior fiscal year. The comparison primarily reflects the following:
| higher revenues related to growth of more than 11,900 average active customer meters; |
| higher revenues due to new base rates in the District of Columbia and Maryland; |
| higher revenues due to accelerated pipe replacement programs; |
| higher revenues due to favorable effects of changes in natural gas consumption patterns; |
| higher realized margins associated with our asset optimization program; and |
| a decrease in the effective tax rate including the reinstatement of regulatory assets related to the tax effect of Med D. |
Offsetting these favorable variances were:
| lower unrealized margins associated with our asset optimization program; |
| higher operating costs; |
| higher property taxes; and |
| an impairment of the old operations center. |
Key gas delivery, weather and meter statistics are shown in the table below for the three months ended December 31, 2013 and 2012.
Gas Deliveries, Weather and Meter Statistics
Three Months Ended December 31, |
Increase/ | |||||||||||
2013 | 2012 | (Decrease) | ||||||||||
Gas Sales and Deliveries (millions of therms) |
||||||||||||
Firm |
||||||||||||
Gas sold and delivered |
289.2 | 264.9 | 24.3 | |||||||||
Gas delivered for others |
158.7 | 150.5 | 8.2 | |||||||||
Total firm |
447.9 | 415.4 | 32.5 | |||||||||
Interruptible |
||||||||||||
Gas sold and delivered |
0.6 | 0.7 | (0.1 | ) | ||||||||
Gas delivered for others |
77.7 | 76.0 | 1.7 | |||||||||
Total interruptible |
78.3 | 76.7 | 1.6 | |||||||||
Electric generationdelivered for others |
37.1 | 51.2 | (14.1 | ) | ||||||||
Total deliveries |
563.3 | 543.3 | 20.0 | |||||||||
Degree Days |
||||||||||||
Actual |
1,394 | 1,309 | 85 | |||||||||
Normal |
1,344 | 1,348 | (4 | ) | ||||||||
Percent colder (warmer) than normal |
3.7 | % | (2.9 | )% | n/a | |||||||
Average active customer meters |
1,111,138 | 1,099,176 | 11,962 | |||||||||
New customer meters added |
4,194 | 3,428 | 766 | |||||||||
64
WGL Holdings, Inc.
Washington Gas Light Company
Part IFinancial Information
Item 2Managements Discussion and Analysis of
Financial Condition and Results of Operations (continued)
Gas Service to Firm Customers. The volume of gas delivered to firm customers is highly sensitive to weather variability as a large portion of the natural gas delivered by Washington Gas is used for space heating. Washington Gas rates are based on an assumption of normal weather. The RNA in Maryland and the WNA and CRA in Virginia are mechanisms designed to, among other things, eliminate the effect on net revenues of variations in weather from normal levels (refer to the section entitled Weather Risk for a further discussion of these mechanisms and other weather-related instruments included in our weather protection strategy).
During the three months ended December 31, 2013, total gas deliveries to firm customers were 447.9 million therms, an increase of 32.5 million therms from 415.4 million therms delivered in the same period of the prior fiscal year. This comparison in natural gas deliveries to firm customers primarily reflects colder weather in the current quarter than in the same quarter of the prior year and an increase in average active customer meters of 11,962.
Weather, when measured by HDDs was 3.7% colder than normal for the three months ended December 31, 2013, compared to 2.9% warmer than normal for the same period of the prior fiscal year. Including the effects of our weather protection strategy in the District of Columbia, there were no material effects on net income attributed to colder or warmer weather for the three months ended December 31, 2013 or 2012.
Gas Service to Interruptible Customers. Washington Gas must curtail or interrupt service to this class of customer when the demand by firm customers exceeds specified levels. Therm deliveries to interruptible customers increased by 1.6 million therms during the three months ended December 31, 2013, compared to the same period of the prior fiscal year, reflecting increased demand due to weather.
In the District of Columbia, the effect on net income of any changes in delivered volumes and prices to interruptible customers is limited by margin-sharing arrangements that are included in Washington Gas rate designs in the District of Columbia. In the District of Columbia, Washington Gas shares a majority of the margins earned on interruptible gas sales and deliveries with firm customers. A portion of the fixed costs for servicing interruptible customers is collected through the firm customers rate design. Rates for interruptible customers in Maryland and Virginia are based on a traditional cost of service approach. In Virginia, Washington Gas retains a majority of the margins earned on interruptible gas and delivery sales. Washington Gas shares actual non-gas margins from interruptible sales service customers that are in excess of delivery service rates. In Maryland, Washington Gas retains a defined amount of revenues based on a set threshold.
Gas Service for Electric Generation. Washington Gas delivers natural gas for use at two electric generation facilities in Maryland that are each owned by companies independent of WGL. During the three months ended December 31, 2013, deliveries to these customers decreased by 14.1 million therms when compared to the same period of the prior fiscal year. Washington Gas shares with firm customers a significant majority of the margins earned from natural gas deliveries to these customers. Therefore, changes in the volume of interruptible gas deliveries to these customers do not materially affect either net revenues or net income.
LIQUIDITY AND CAPITAL RESOURCES
Liquidity and capital resources for Washington Gas are substantially the same as the liquidity and capital resources discussion included in the Managements Discussion of WGL (except for certain items and transactions that pertain to WGL and its unregulated subsidiaries). Those explanations are incorporated by reference into this discussion.
RATES AND REGULATORY MATTERS
Washington Gas makes its requests to modify existing rates based on its determination of the level of net investment in plant and equipment, operating expenses, and a level of return on invested capital that is just and reasonable. The following is an update of significant current regulatory matters in each of Washington Gas jurisdictions. For a more detailed discussion of the matters below, refer to our combined Annual Report on Form 10-K for WGL and Washington Gas for the fiscal year ended September 30, 2013.
District of Columbia Jurisdiction
District of Columbia Base Rate Case.
On August 15, 2013, Washington Gas filed a request for approval with the PSC of DC of a revised accelerated pipe replacement plan (Plan) and surcharge mechanism to recover the associated costs for the first five years of the Plan. Washington Gas proposes to replace bare and/or unprotected steel services, bare and targeted unprotected steel main, and cast iron main in its distribution system in the District of Columbia at an estimated five-year cost of $110 million. Comments and replies were filed by interested parties. A PSC of DC order in this matter is pending.
65
WGL Holdings, Inc.
Washington Gas Light Company
Part IFinancial Information
Item 2Managements Discussion and Analysis of
Financial Condition and Results of Operations (continued)
Weather Normalization Adjustment. On November 8, 2013, Washington Gas filed an Application for Approval of a Weather Normalization Adjustment, which is a rate design mechanism that eliminates the variability of weather from the calculation of actual billed revenues and offers customers more stability in their bills during colder-than-normal winter heating seasons. Comments and replies have been filed regarding Washington Gas application. A PSC of DC order in this matter is pending.
Maryland Jurisdiction
Maryland Base Rate Case. On October 10, 2013, Public Utility Law Judge issued a Proposed Order recommending an $8.8 million increase in annual revenues based on an overall rate of return of 7.54% and a return on common equity of 9.25%. In addition, the Proposed Order recommended that Washington Gas be allowed to amortize the costs related to the change in tax treatment of Med D, but recommended disallowance of the costs to initiate the outsourcing agreement with Accenture LLP. The proposed order recommended that Washington Gas be allowed to recover the costs incurred related to the proposed Chillum liquefied natural gas facility, but recommend that the unamortized balance not be included in rate base. On October 24, 2013, Washington Gas and other parties to the case filed appeal memoranda on the proposed order. Washington Gas requested the PSC of MD to accept Washington Gas proposed capital structure and approve a rate of return on equity of no less than 9.60%. Washington Gas also requested the PSC of MD to approve the amortization of the costs to achieve related to the outsourcing, to correct a mathematical error and clarify other issues in the case. On November 22, 2013, the PSC of Maryland issued an order granting an overall increase of $8.9 million, based on the capital structure recommended by the Staff of the PSC. The order approved a return on equity of 9.50% resulting in an overall rate of return of 7.70%. The order also clarified that Washington Gas was authorized to establish a regulatory asset and amortize the costs related to the change in tax treatment of Med D. Finally, the PSC denied Washington Gas appeal on recovery of the costs to initiate the outsourcing agreement with Accenture, LLP. As a result of this order, Washington Gas has established a Med D regulatory asset in the first quarter of fiscal year 2014 and has begun amortizing the balance. On December 20, 2013, Washington Gas filed a request for rehearing and an appeal with the Baltimore City Circuit Court appealing the PSCs rulings on capital structure, return on equity, and recovery of the costs to initiate the outsourcing agreement. The case is pending further commission action.
Maryland Strategic Infrastructure Development and Enhancement Plan. On November 7, 2013, pursuant to a new law in Maryland, Washington Gas filed an application with the PSC of MD for authority to implement a Strategic Infrastructure Development and Enhancement Plan (STRIDE Plan) and to recover the reasonable and prudent costs associated with the infrastructure replacements through monthly surcharges to system charges. The surcharge may not exceed $2.00 per month for residential customers. Under the new law, eligible infrastructure means replacement or improvement of existing infrastructure of a gas company that (i) is made on or after June 1, 2013; (ii) is designed to improve public safety or infrastructure reliability; (iii) does not increase revenue of a gas company by connecting directly to new customers; (iv) reduces or has the potential to reduce greenhouse gas emissions through a reduction in leaks; and (v) is not included in the current rate base of the gas company. In the application, Washington Gas proposes to invest approximately $200 million in the initial five years of a 22-year overall plan. The STRIDE Plan will enable Washington Gas to expedite replacement of aging infrastructure in its distribution system in Maryland. The new law provides that the Commission must approve the cost-recovery schedule associated with the STRIDE Plan at the same time that it approves the Plan and has 180 days to issue a final decision on Washington Gas request.
Virginia Jurisdiction
Affiliate Transactions. On October 2, 2012, Washington Gas filed an application with the SCC of VA for approval of revised service agreements between Washington Gas and two affiliatesWGEServices and WGESystems. The revised service agreements incorporate recommendations from the Staff of the SCC of VA that Washington Gas agreed to include as part of the stipulation approved in Washington Gas Virginia base rate case, revisions to the descriptions of services provided to the affiliates, and revisions to permit the two affiliates to participate in some health and welfare plans sponsored by Washington Gas. On December 21, 2012, the SCC of VA approved the revised services agreements with only minor modifications. On January 18, 2013, Washington Gas filed a separate application requesting approval of revised service agreements between Washington Gas and each of the remaining five affiliates receiving services.
On April 2, 2013, Washington Gas filed a second amendment to provide additional services to two of its affiliates, and to further revise the proposed service agreements that were included in the January 18, 2013 application. On May 24, 2013, the SCC of VA approved revised service agreements for WGL Holdings Inc., Washington Gas Resources Corp., Hampshire Gas Company, Crab Run Gas Company and WGL Midstream.
66
WGL Holdings, Inc.
Washington Gas Light Company
Part IFinancial Information
Item 2Managements Discussion and Analysis of
Financial Condition and Results of Operations (concluded)
On June 16, 2011, Washington Gas submitted an application to the SCC of VA requesting approval of three affiliate transactions with WGL Midstream: (i) the transfer to WGL Midstream of the remainder of the term of two agreements for natural gas storage service at the Washington Gas Storage (WSS) and Eminence Storage Service (ESS) storage fields; (ii) the sale to WGL Midstream of any storage gas balances associated with the WSS and ESS agreements; and (iii) the assignment to WGL Midstream of Washington Gas rights to buy base gas in the WSS storage field. The SCC of VA did not approve the transfer of the agreements on the grounds that ratepayers funded a portion of the costs associated with the assets. On June 5, 2013, Washington Gas filed requesting the SCC of VA to issue a declaratory judgment that the proposed capacity releases are governed by the FERC and the SCC of VA does not have jurisdiction over the transaction.
On October 31, 2013, the Senior Hearing Examiner issued a Report finding that the SCC of VA has jurisdiction over the proposed transfers. Washington Gas filed comments on the Report on December 5, 2013. The case is pending review by the SCC of VA.
67
WGL Holdings, Inc.
Washington Gas Light Company
Part IFinancial Information
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The following issues related to our market risks are included under Item 2, Managements Discussion and Analysis of Financial Condition and Results of Operations, and are incorporated by reference into this discussion.
| Price Risk Related to the Regulated Utility Segment |
| Price Risk Related to the Non-Utility Segments |
| Value-At-Risk |
| Weather Risk |
| Interest-Rate Risk |
ITEM 4. CONTROLS AND PROCEDURES WGL Holdings, Inc.
Senior management, including the Chairman and Chief Executive Officer and the Senior Vice President and Chief Financial Officer of WGL, evaluated the effectiveness of WGLs disclosure controls and procedures (as such term is defined in Rule 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934) as of December 31, 2013. Based on this evaluation process, the Chairman and Chief Executive Officer and the Senior Vice President and Chief Financial Officer have concluded that disclosure controls and procedures of WGL are effective. There have been no changes in the internal control over financial reporting of WGL during the quarter ended December 31, 2013 that have materially affected, or are reasonably likely to materially affect, the internal control over financial reporting of WGL.
ITEM 4. CONTROLS AND PROCEDURESWashington Gas Light Company
Senior management, including the Chairman and Chief Executive Officer and the Senior Vice President and Chief Financial Officer of Washington Gas, evaluated the effectiveness of the disclosure controls and procedures (as such term is defined in Rule 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934) of Washington Gas as of December 31, 2013. Based on this evaluation process, the Chairman and Chief Executive Officer and the Senior Vice President and Chief Financial Officer have concluded that the disclosure controls and procedures of Washington Gas are effective. There have been no changes in the internal control over financial reporting of Washington Gas during the quarter ended December 31, 2013 that have materially affected, or are reasonably likely to materially affect, the internal control over financial reporting of Washington Gas.
68
Washington Gas Light Company
Part IIFinancial Information
The nature of our business ordinarily results in periodic regulatory proceedings before various state and federal authorities. For information regarding pending federal and state regulatory matters, see Note 13 Commitments and Contingencies, contained in Part I under the Notes to Consolidated Financial Statements.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
Exhibits:
Schedule/ Exhibit |
Description | |
(a)(3) | Exhibits | |
Exhibits Filed Herewith: | ||
31.1 | Certification of Terry D. McCallister, the Chairman and Chief Executive Officer of WGL Holdings, Inc., pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
31.2 | Certification of Vincent L. Ammann, Jr., the Senior Vice President and Chief Financial Officer of WGL Holdings, Inc., pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
31.3 | Certification of Terry D. McCallister, the Chairman and Chief Executive Officer of Washington Gas Light Company, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
31.4 | Certification of Vincent L. Ammann, Jr., the Senior Vice President and Chief Financial Officer of Washington Gas Light Company, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
32 | Certification of Terry D. McCallister, the Chairman and Chief Executive Officer, and Vincent L. Ammann, Jr., the Senior Vice President and Chief Financial Officer, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | |
101.INS | XBRL Instance Document: | |
101.SCH | XBRL Schema Document: | |
101.CAL | XBRL Calculation Linkbase Document: | |
101.LAB | XBRL Labels Linkbase Document: | |
101.PRE | XBRL Presentation Linkbase Document: | |
101.DEF | XBRL Definition Linkbase Document.
Exhibits Incorporated by Reference: | |
3 | Articles of Incorporation & Bylaws: | |
Washington Gas Light Company Charter, filed on Form S-3 dated July 21, 1995. | ||
WGL Holdings, Inc. Charter, filed on Form S-4 dated February 2, 2000. |
69
WGL Holdings, Inc.
Washington Gas Light Company
Part IIOther Information
Schedule/ Exhibit |
Description | |
Bylaws of WGL Holdings, Inc. as amended on March 7, 2013, filed as Exhibit 3.1 to Form 8-K on March 13, 2013. Bylaws of Washington Gas Light Company as amended on March 7, 2013, filed as Exhibit 3.2 to Form 8-K on March 13, 2013. |
70
WGL Holdings, Inc.
Washington Gas Light Company
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrants have duly caused this report to be signed on their behalf by the undersigned, thereunto duly authorized.
WGL HOLDINGS, INC. and WASHINGTON GAS LIGHT COMPANY |
||||||
(Co-registrants) | ||||||
Date: February 5, 2014 |
/s/ William R. Ford |
|||||
William R. Ford | ||||||
Vice President and Chief Accounting Officer (Principal Accounting Officer) |
71
Exhibit 31.1
CERTIFICATION OF WGL HOLDINGS, INC.
I, Terry D. McCallister, certify that:
1. | I have reviewed this quarterly report on Form 10-Q of WGL Holdings, Inc.; |
2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
4. | The registrants other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
a) | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
b) | Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
c) | Evaluated the effectiveness of the registrants disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
d) | Disclosed in this report any change in the registrants internal control over financial reporting that occurred during the registrants most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrants internal control over financial reporting; and |
5. | The registrants other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrants auditors and the audit committee of the registrants board of directors: |
a) | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrants ability to record, process, summarize and report financial information; and |
b) | Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrants internal control over financial reporting. |
Date: February 5, 2014
/s/ Terry D. McCallister |
Terry D. McCallister |
Chairman and Chief Executive Officer |
Exhibit 31.2
CERTIFICATION OF WGL HOLDINGS, INC.
I, Vincent L. Ammann, Jr., certify that:
1. | I have reviewed this quarterly report on Form 10-Q of WGL Holdings, Inc.; |
2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
4. | The registrants other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
a) | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
b) | Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
c) | Evaluated the effectiveness of the registrants disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
d) | Disclosed in this report any change in the registrants internal control over financial reporting that occurred during the registrants most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrants internal control over financial reporting; and |
5. | The registrants other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrants auditors and the audit committee of the registrants board of directors: |
a) | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrants ability to record, process, summarize and report financial information; and |
b) | Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrants internal control over financial reporting. |
Date: February 5, 2014
/s/ Vincent L. Ammann, Jr. |
Vincent L. Ammann, Jr. |
Senior Vice President and Chief Financial Officer |
Exhibit 31.3
CERTIFICATION OF WASHINGTON GAS LIGHT COMPANY
I, Terry D. McCallister, certify that:
1. | I have reviewed this quarterly report on Form 10-Q of Washington Gas Light Company; |
2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
4. | The registrants other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
a) | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
b) | Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
c) | Evaluated the effectiveness of the registrants disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
d) | Disclosed in this report any change in the registrants internal control over financial reporting that occurred during the registrants most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrants internal control over financial reporting; and |
5. | The registrants other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrants auditors and the audit committee of the registrants board of directors: |
a) | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrants ability to record, process, summarize and report financial information; and |
b) | Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrants internal control over financial reporting. |
Date: February 5, 2014
/s/ Terry D. McCallister |
Terry D. McCallister |
Chairman and Chief Executive Officer |
Exhibit 31.4
CERTIFICATION OF WASHINGTON GAS LIGHT COMPANY
I, Vincent L. Ammann, Jr., certify that:
1. | I have reviewed this quarterly report on Form 10-Q of Washington Gas Light Company; |
2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
4. | The registrants other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
a) | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
b) | Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
c) | Evaluated the effectiveness of the registrants disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
d) | Disclosed in this report any change in the registrants internal control over financial reporting that occurred during the registrants most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrants internal control over financial reporting; and |
5. | The registrants other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrants auditors and the audit committee of the registrants board of directors: |
a) | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrants ability to record, process, summarize and report financial information; and |
b) | Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrants internal control over financial reporting. |
Date: February 5, 2014
/s/ Vincent L. Ammann, Jr. |
Vincent L. Ammann, Jr. |
Senior Vice President and Chief Financial Officer |
Exhibit 32
CERTIFICATION OF THE CHAIRMAN AND CHIEF EXECUTIVE OFFICER
AND THE SENIOR VICE PRESIDENT AND CHIEF FINANCIAL OFFICER
PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the combined Quarterly Report of WGL Holdings, Inc. and Washington Gas Light Company (the Companies) on Form 10-Q for the quarterly period ended December 31, 2013 as filed with the Securities and Exchange Commission on the date hereof (the Report), Terry D. McCallister, Chairman and Chief Executive Officer of the Companies, and Vincent L. Ammann, Jr., Senior Vice President and Chief Financial Officer of the Companies, each hereby certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, to the best of their knowledge, that:
(1) | The Report fully complies with the requirements of Section 13(a) of the Securities Exchange Act of 1934; and |
(2) | The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Companies. |
This certification is being made for the exclusive purpose of compliance by the Chairman and Chief Executive Officer and the Senior Vice President and Chief Financial Officer of the Companies with the requirements of Section 906 of the Sarbanes-Oxley Act of 2002, and may not be disclosed, distributed, or used by any person for any reason other than as specifically required by law.
/s/ Terry D. McCallister |
Terry D. McCallister |
Chairman and Chief Executive Officer |
/s/ Vincent L. Ammann, Jr. |
Vincent L. Ammann, Jr. |
Senior Vice President and Chief Financial Officer |
February 5, 2014 |
Earnings Per Share (Details) (USD $)
In Thousands, except Per Share data, unless otherwise specified |
3 Months Ended | |
---|---|---|
Dec. 31, 2013
|
Dec. 31, 2012
|
|
Net Income (Loss) applicable to common stock | $ 18,629 | $ 52,388 |
Weighted Average Number of Shares Outstanding, Basic | 51,816 | 51,631 |
Stock-based compensation plans | 11 | 57 |
Diluted EPS | 51,827 | 51,688 |
Earnings Per Share, Basic | $ 0.36 | $ 1.01 |
Earnings Per Share, Diluted | $ 0.36 | $ 1.01 |
Antidilutive Securities Excluded from Computation of Earnings Per Share, Amount | 0 | 0 |
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